Capital Man

The French economist Thomas Piketty arrived in Washington, D.C., on Sunday for a week of talks at some of the nation’s leading policy-research centers but which might as well have been billed as a victory lap up the East Coast. The English translation of Piketty’s new book, Capital in the Twenty-first Century, a formidably rigorous, 700-page history of wealth, out barely five weeks, had just made The New York Times’s best-seller list. But even before it appeared, on the strength of a handful of advance reviews and a surge of Internet buzz, Piketty’s transformation was complete: from respected researcher on income distribution to ranking heavyweight, a scholar who, armed with reams of data and charts—and, unusual for an economist, a gilded tongue—proposed to upend decades of mainstream wisdom on inequality though an unprecedented analysis of the past.

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The Economist declared that Piketty’s book may "revolutionize the way people think about the economic history of the past two centuries" and started an online reading group to discuss it chapter by chapter. The British magazine Prospect added Piketty to its annual list of the most influential world thinkers, and his book was said to be making the rounds in the office of Ed Milliband, the British Labour Party leader. Documentary filmmakers were vying for the chance to turn the book into a movie; a composer was seeking Piketty’s blessing to make it an opera.

Now the 42-year-old Frenchman had come, like a wonkish heir to de Tocqueville, to tell Americans how to salvage what he called their "egalitarian pioneer ideal" from a potentially devastating "drift toward oligarchy." His anointment was all the more remarkable in that he intended his book not just as a novel argument about inequality but as a pointed rebuke to his field—in particular its American wing.

On Monday, Piketty’s stops included the White House Council of Economic Advisers, the Government Accountability Office, and the office of the Treasury secretary, Jacob Lew, who summoned him for a private sit-down to discuss his proposal for a progressive tax on wealth. On Tuesday, he appeared in the company of Nobelists: George Akerlof, who, introducing Piketty to a group at the International Monetary Fund, declared that he had "entered rock stardom—economist-style"; and Robert Solow, who, at the Economic Policy Institute, where a crowd of several hundred had braved a freezing downpour to hear Piketty talk, praised the originality of his argument and the "sheer collection, presentation, and analysis" of his data, predicting that "we’re going to be digesting that for a long time."

Piketty weathered the fuss with a modest smile. He wore a gray suit jacket but no tie, and with his close-cropped dark hair, clean-scrubbed round face, and unassuming demeanor, he suggested less a rock star than a particularly earnest graduate student. Speaking without notes for 45 minutes at a stretch, in rapid-fire English as engaging as his prose, he eagerly laid out his findings. "The top of the wealth distribution has been rising at 6 to 7 percent per year—three times faster than the world economy," he told the audience at the Economic Policy Institute. "Nobody knows where this will stop."

The boldness of Piketty’s thesis is belied by its apparent simplicity: Inequality is intrinsic to capitalism, and, if not forcefully combatted, is likely to increase—to levels that threaten our democracy and fail to sustain economic growth. Karl Marx predicted much worse—runaway inequality leading ultimately to social collapse—and Piketty takes care to distinguish his view from Marx’s apocalypse. Even so, his thesis runs directly counter to mainstream economic theory, which holds that inequality should eventually decline, a process known as "convergence."

According to Piketty, whose data on income and wealth span three centuries and 20 countries, the forces of convergence (the spread of knowledge and skills, for example) are considerable, but those of divergence have typically had the upper hand. The crux of his argument is a deceptively simple formula: r > g, where r stands for the average annual rate of return on capital (i.e. profits, dividends, interest, and rents) and g stands for the rate of economic growth. For much of modern history, he contends, the rate of return on capital has hovered between 4 and 5 percent, while the growth rate has been decisively lower, between 1 and 2 percent. (Piketty makes a compelling case that economic growth, which depends in good part on population growth, is unlikely to accelerate dramatically anywhere but in Africa, given current demographic trends.) Thus he adduces capitalism’s "principal destabilizing force": Whenever r > g, "capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based."

In other words, in a slow-growing economy, accumulated wealth grows faster than income from labor. So the rich, who already hold most of the wealth, will get richer, while everyone else, who depend mostly on income from their jobs, will be lucky to keep up with inflation. Countries in which r > g constitute much of the developed world today, including the United States, where the wealthiest 10 percent account for more than 50 percent of the national income, and which, if Piketty’s right, may fast be becoming the world’s worst offender. Across the West, he writes, the levels of inequality "are increasing at a rate that cannot be sustained in the long run and that ought to worry even the most fervent champions of the self-regulated market." (In Piketty’s scheme, the self-regulated market is by definition an r > g regime: "the more perfect the capital market [in the economist’s sense], the more likely r is to be greater than g.") Impressed by Piketty’s juxtaposition of r and g, Solow remarked, "So far as I know, nobody had ever fastened on that before."

The notable exception to the reign of r > g is the period between 1945 and 1970, capitalism’s so-called Golden Age, also known as the "great compression," when the economies of Western Europe and the United States expanded and inequality declined. It’s no coincidence, Piketty suggests, that this period spawned modern economics’ optimistic credo: a free market delivers dividends to all. That mantra, he insists, is based on an illusion. Viewed in historical context, the Golden Age reveals itself to have been an aberration—a transient exception to the gloomy r > g rule. Two World Wars and the Great Depression, accompanied by "confiscatory" tax rates imposed on the rich to pay for the war effort, severely reduced many family fortunes, temporarily narrowing the gap between the upper and lower classes. Where convergence theory declared that inequality follows a bell curve, declining as an economy matures, Piketty found the converse to be true: inequality in the 20th century describes an inverted bell curve—a U-shape—whose steep upward climb now shows no signs of abating.

Apparently bedazzled by the book’s arguments, few reviewers mentioned its assault on the field. Yet Piketty’s disdain is unmistakable, the lament of a scholar long estranged from the mainstream of his profession. "For far too long," he writes, "economists have sought to define themselves in terms of their supposedly scientific methods. In fact, those methods rely on an immoderate use of mathematical models, which are frequently no more than an excuse for occupying the terrain and masking the vacuity of the content. Too much energy has been and still is being wasted on pure theoretical speculation without a clear specification of the economic facts one is trying to explain or the social and political problems one is trying to resolve."

Piketty’s first published paper appeared in the Journal of Economic Theory in 1993, when he was 22. It consisted of a mathematical model for designing an optimal income tax schedule—and featured abundant references to game theory, Pareto optimality, and Bayesian equilibriums. A precocious math student, Piketty had entered the elite École Normale Supérieure, in Paris, at 18, and by the time he turned 22 had a Ph.D. in economics and job offers from MIT, Harvard, and the University of Chicago. "They were very excited because I was a machine proving theorems, and they liked that," Piketty told me. He chose MIT and moved to Cambridge, Mass. He stayed just two years.

He liked living in the United States and his colleagues at MIT, and it was exciting to teach graduate students, who were mostly older than he was. "At the same time that I was very happy, I was thinking that something strange was going on," he recalled. The problem, he quickly concluded, was that he "knew nothing at all about economics."

He continued to publish theorems on income distribution but increasingly wondered how inequality looked in the real world. How had it evolved over time? "I realized that there was a lot of data out there that had never been used in a systematic way," he said. As a student, he’d been as interested in history and sociology as in economics, admiring the work of Pierre Bourdieu, Fernand Braudel, and Claude Lévi-Strauss. Piketty’s parents, who never finished high school, had joined the student protests of 1968, and, as a teenager, Piketty spent a summer working for a grandfather—"an entrepreneur with a strong capitalist ethic"—who owned a stone quarry outside Paris. Yet greater influences on his development, he believes, were the dramatic events taking place in Eastern Europe. The year he entered the École Normale, the Berlin Wall fell, and by the time he left the Soviet Union had collapsed as well. "It was natural and important to me to ask the question: What can we say about inequality and social justice and the dynamics of distribution under capitalism? Why is it that people thought at some point that communism was necessary?"

Piketty’s colleagues showed little interest in historical research. "What I found quite surprising when I was at MIT was that sometimes there was a level of arrogance with respect to other disciplines in the social sciences, which is really quite incredible," he said. "In the case of income distribution, which is what I was interested in, we had almost no historical facts about which we knew anything. I found the gap between the self-confidence of the profession and the actual achievement of the profession quite astonishing."

Or, as Branko Milanovic, senior scholar the Luxembourg Income Study Center at the Graduate Center of the City University of New York, and an early champion of Piketty’s book put it to me, "There is this sterility to the mathematical models, which are not grounded in reality but in what somebody imagines the behavior of people to be. Economics has lost its taste to address big issues. We have gone into tiny issues, the extreme of which is Freakonomics, which addresses the behavior of sumo wrestlers and why drug dealers live with their mothers. In Spain we have 25-percent unemployment, and you’re discussing sumo wrestlers!"

In one sense, critiques of the discipline are nothing new. Economists, a voluble lot, seem to occupy a disproportionate amount of the blogosphere, and spend a good deal of their time there engaged in heated methodological debate. In a high-profile spat in March, Paul Krugman and Lars P. Syll, an economist at Malmö University, in Sweden, posted rival views of IS-LM (for investment saving-liquidity money), a model that has been a mainstay of macroeconomic theory for decades. Syll dismissed IS-LM as a "brilliantly silly gadget." Krugman defended it as "a simplification of reality designed to provide useful insight into particular questions. And since 2008 it has done that job, yes, brilliantly." (In a follow-up post, Krugman was more circumspect: "You should use models, but you should always remember that they’re models, and always beware of conclusions that depend too much on the simplifying assumptions." )

Still, it’s one thing to trade barbs online, and quite another to present your magnum opus as an act of methodological sedition. Capital in the Twenty-first Century, Piketty makes clear, is his notion of what economics scholarship should look like: combining analyses of macro (growth) and micro (income distribution) issues; grounded in abundant empirical data; larded with references to sociology, history, and literature; and sparing on the math. In its scale and scope, the book evokes the foundational works of classical economics by Ricardo, Malthus, and Marx—to whose treatise on capitalism Piketty’s title alludes. The sizable recent literature on various aspects of inequality earns barely a mention. "There is a fair amount of empirical work out there," says James K. Galbraith, of the University of Texas at Austin who studies wage inequality and who published one of the few skeptical reviews of the book to date, in Dissent. "He has a tendency to make deferential reference to mainstream thinkers while ignoring the critiques that already exist."

By contrast, the novels of Jane Austen, Balzac, and Henry James merit a section of their own. Piketty goes so far as to extrapolate, from a close reading of Balzac’s Père Goriot, a phenomenon he calls "Rastignac’s dilemma," to denote the fact that throughout the 19th century, marrying into inherited wealth was a much surer—and perfectly acceptable—route to a comfortable life than trying to get ahead by dint of one’s talent, education, and hard work. Today, Piketty writes, prime-time shows like House, Bones, and West Wing "feature heroes and heroines laden with degrees and high-level skills" and appear to celebrate "a just inequality, based on merit, education, and the social utility of elites." But this, he says, may be so much wishful thinking: the number of huge bequests has fallen since the Belle Époque, yet in Europe, and to a lesser extent in the United States, the amount of inherited wealth has rebounded to that historic level and in Piketty’s view continues to wield a distorting effect on our democracy.

No doubt the book’s accessible eloquence has been a boon to its reception. One critic, noting Piketty’s ironic wit, compared his footnotes to Gibbon’s. (A typical aside: "Among the members of these upper-income groups are U.S. academics and economists, many of whom believe that the economy of the United States is working fairly well, and, in particular, that it rewards talent and merit accurately and precisely.") But Piketty has also benefited from excellent timing.

After leaving MIT in 1995, Piketty returned to Paris and spent the next three years in the basement archives of the French Finance Ministry, culling income, inheritance, and tax-law data from crumbling dossiers. The result of that research was his first book, Les haut revenues en France au XXe siècle: inégalités et redistribution, 1901-1998 (The Top Incomes in France in the 20th Century: Inequality and Redistribution, 1901-1998), in which he first discovered the U-shaped curve describing inequality in 20th-century France. Piketty says that he would not have written the book had he stayed at MIT—or at least not until he had tenure. "I wanted to return to France because I wanted to get closer to historians and sociologists," he told me. "My feeling was that if I stayed at MIT, I would have strong incentives to keep doing what I was good at, which was math theorems."

He sent the book to Anthony Atkinson, an eminent scholar of income inequality at the University of Oxford who has since become a collaborator. Atkinson proposed that Piketty extend his study to other countries. He returned to MIT for a semester in 2000, and while there recruited Emmanuel Saez, then a graduate student in economics, to collaborate with him on a study of income data from the United States. Other researchers on income distribution tended to rely mainly on self-reported household surveys; Piketty used federal income-tax returns, which were introduced in 1913, and which provide a much more accurate picture of incomes at the top.

He wasn’t the first to use such data. Simon Kuznets, author of the influential bell-curve theory of inequality in the 1950s, had also relied on income-tax returns. But his data covered only the period between 1913 and 1948—when inequality declined—and Kuznets himself was more circumspect about the value of his "Kuznets curve" than many of his followers, whose zeal Piketty ascribes to Cold War geopolitics. "When the competition between the Soviet model and capitalist model was very strong, people in the West so much wanted to believe that market economies could bring a reduction in inequality and could bring a balance of distribution of income and wealth," he told me. With characteristic modesty, Piketty suggested that his main advantage as an economist was to have been born into a generation for whom "the conflict between communism and capitalism no longer really exists." However, for many disciples of Kuznets, the demise of the Soviet Union seems mostly to have reinforced their faith. In 2011, a committee of leading economists voted the 1955 paper in which Kuznets introduced his famous curve one of the top-20 most influential articles published in American Economic Review.

Piketty’s innovation was to extend Kuznets’s work across many more decades and countries, at a time when most economists, if they relied on empirical data, focused on just a few decades and mostly on wages, not wealth. Or else they obtained their data through controlled experiments rather than through historical research. "What’s actually quite strange is that this has not been done before," Piketty says of his long-range analysis. "It’s too historical for economists and too economic for historians. It’s a kind of academic no-man’s land."

In 2003, Piketty, who had become a professor at the École des Hautes Études en Sciences Sociales, and Emmanuel Saez published their findings on income inequality in the United States. Once again, the data yielded a U-shaped curve over the course of the 20th-century. (If anything, Piketty says, their analysis underestimates the rate of inequality today, given that many top capital holders sequester their wealth in tax havens overseas, where it goes unreported.) At first, their paper provoked little comment. That year, Robert E. Lucas Jr., a Nobel Prize-winning economist at the University of Chicago, declared that "of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution." Lucas, a supply-side enthusiast, urged faith in the long-term benefits of economic growth: "The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production."

Five years later, with the collapse of the real-estate market and revelations of predatory lending practices and bloated CEO compensation at investment banks, inequality was suddenly news. Early in 2009, the Obama administration featured, in an overview of the president’s budget, a graph from Piketty and Saez’s research showing the steep upward climb of national income going to the top 1 percent. Seizing on the graph, The Wall Street Journal christened it "the Rosetta Stone to the presidential mind of Barack Obama," thus helping to promote the idea (no doubt exaggerated) of Piketty and Saez’s influence in the White House. In May 2011, the Columbia University economist Joseph E. Stiglitz reported in Vanity Fair that the top 1 percent of Americans now controlled 40 percent of the country’s wealth, making "the 1 percent" a household term and a resounding epithet for the Occupy movement, which took off that fall. Two years later, Robert Reich, the former labor secretary who is now a professor at Berkeley, cited Piketty and Saez’s work—and gave Saez a cameo—in his popular documentary, Inequality for All.

By last December, as word of Piketty’s book, already out in France, began to spread, inequality as a political topic had undergone a transformation of its own: from pet obsession of the liberal left to bipartisan priority. That month, President Obama devoted a major speech to the subject, calling inequality "the defining challenge of our time." Prominent Republicans, including House Majority Leader Eric Cantor and Senator Marco Rubio, soon followed suit, delivering speeches that invoked, however cautiously, income inequality (Rubio’s on the 50th anniversary of President Lyndon B. Johnson’s "War on Poverty" address), and the Senate finance committee held a hearing on the plight of the middle class.

Whether Capital in the Twenty-first Century survives its spectacular debut to become an inspiration for future scholarship—let alone future policy—will depend in part on how Piketty’s data and interpretation hold up over time. The grumblings of dissent here and there have yet to coalesce into a powerful rebuttal. (Appearing with Piketty on a panel in Washington, Kevin Hassett, an economist at the American Enterprise Institute, argued that if you factor in after-tax government transfers, like food and welfare subsidies, to lower-income groups in the past 30 years, these virtually compensate for the increase in income in the top 20 percent. To which Piketty replied, "It’s true there has been a big rise in transfers. But I’m surprised that someone like you, at the AEI, is happy that transfers are decreasing inequality.") Even detractors agree that the World Top Incomes Database, which Piketty and his collaborators have assembled at the Paris School of Economics, where he now teaches, is invaluable. Covering 30 countries to date, it is by far the largest international database on inequality.

Less likely to endure is Piketty’s remedy for inequality: a progressive global wealth tax on fortunes over 1-million euros.

In Washington, a policy town, remedies were what many of Piketty’s commentators wanted to talk about, and they tended to dismiss his proposal, while taking the opportunity to promote their own ideas instead. Even Piketty concedes that enforcing a global wealth tax would require unprecedented levels of international cooperation and, at least in the United States, where higher taxes are widely believed to lead to lower growth, overcoming entrenched political opposition. Still, in his book he makes an impassioned case, noting that, after all, the United States invented the concept of confiscatory taxation—back in 1919, when Congress introduced a top marginal income-tax rate of 77 percent—out of a conviction that huge incomes and estates were "socially unacceptable and economically unproductive." (Today the top U.S. income-tax rate is about 40 percent.) Piketty’s argument recently got an indirect boost from a much-discussed study published in February by the International Monetary Fund, hardly a radical body. The study, a multicountry analysis of income inequality, found not only that there is "scant evidence that typical efforts to redistribute"—taxes and credits—"have on average had an adverse effect on growth," but that lower inequality was generally associated with faster growth." As Jonathan D. Ostry, the study’s lead author, put it in an email to me, "this logic was indeed an eye opener for us."

On Wednesday evening, Piketty was in New York, on a panel at CUNY with more Nobelists: Joseph Stiglitz (who has won two) and Paul Krugman, along with Steven Durlauf, an economist at the University of Wisconsin at Madison. Among the audience at CUNY’s auditorium in midtown were two dozen reporters. So great was the media interest in Piketty that reporters were assigned to a designated seating area, and a press room was set aside for them to interview him at the end of the evening.

Earlier that day, he had appeared at the Council on Foreign Relations and the United Nations, but at CUNY he was among his own kind: academics. He looked delighted. "The United States of America invented progressive taxation largely because they didn’t want to look like class-ridden Europe," he said as, still tieless but beaming broadly, he showed the audience a Power Point graph tracing the fluctuations in the top income-tax rate.

The other panelists were effusive in their praise. "This is a fantastic book!" Krugman crowed. "It solves problems that people have worried at for decades." "Some of us went to graduate school at a particular point on his curve, when things were looking very good" Stiglitz said ruefully. "It gave us a distorted view of the world."

In their excitement over Piketty’s ideas about inequality, they occasionally waded into technical terrain—stochastic modeling and marginal-productivity theory were invoked more than once. But they were just as eager to discuss his remedy, the global wealth tax. "We have some Supreme Court decisions that basically say that corporations are people in terms of their ability to spend money on politics but not in terms of their accountability," noted Stiglitz. "It’s not going to be an easy battle." Krugman cited Theodore Roosevelt’s "New Nationalism" speech of 1910, in which he called for progressive income and inheritance taxes on "big fortunes." That speech, Krugman suggested, is a reason to feel hopeful that Americans might one day decide to combat inequality again. "The pessimistic view is that the 20th-century narrowing of inequality is entirely the result of wars," he said. "But, in fact, Teddy Roosevelt was giving that speech before the war, which says that a democratic political system which believes in ideals is capable of reforming itself in the absence of catastrophe."

Piketty was still smiling when he was escorted from the stage. A roomful of reporters awaited him, and, after that, a fancy dinner. Then he would be on his way—next stop Boston.

Emily Eakin, a former senior editor at The New Yorker, is working on a book about contemporary medical culture.