Piketty's Capital in the 21st Century, or Inequality Through the Ages

Thomas Piketty is in the news again, for turning down the French Legion of Honor, a decision that is difficult for Americans to understand. The equivalent would be turning down the Presidential Medal of Freedom, and Google does not turn up any nominee who has. In Britain, among the Rolling Stones, Keith Richards turned down the knighthood but Mick Jagger accepted it. Author Doris Lessing also refused, not wanting to be an old person "accepting honors from an institution she attacked when young."

Likewise, in France, many "rebels," from Maurice Ravel to Jean-Paul Sartre, have refused to be "bought off" by the Legion of Honor. But Piketty is no rebel; he is a member of the academic establishment and a civil servant to the state he is refusing this honor from.

This happened a day after I finished reading his Capital in the 21st Century, almost seven months after first hearing about it on the Colbert Report. It is a remarkable book and I recommend it, but it makes you spend more time in the 19th and 20th century than in the 21st. As a title, "Inequality Through the Ages" might have sold fewer copies, but it would have been more descriptive. The original, French edition is 950 pages long, of which only the last 200 are about the future and what the author thinks governments should do to make the world economy serve the common good.

Unless you have read the preceding 700, however, you are unlikely to understand the reasons for his prescriptions, let alone agree. As an impatient reader, I first skipped to the last part, and didn't understand it. What does Thomas Piketty think we should do? A worldwide, progressive tax on capital? I could see neither why it would do any good nor how it could be implemented.

So I went back to the beginning and read the book cover to cover, which took me about four months. It's not mind candy, but it is a rewarding intellectual journey. While I still don't necessarily agree with all of Piketty's recommendations, I believe I now understand the case he is making.

Inequality as a Touchy Subject

Inequality in society is a subject we all care about. Unequal treatment of individuals generates strong emotions, and, as Frank de Waal demonstrated in his 2011 TED talk, even among capuchin monkeys receiving treats of cucumber or grapes.

Equality, fairness, and justice are subjects of strong disagreements, and this keeps you going while reading page after page about the evolution of the ratio of private wealth to national income in Canada since 1870, or of the average inheritance age in England and France since 1800.

Piketty opens the book with a quote from the 1789 French declaration of human rights. Its Article 1 has two clauses. The first one, the best known, says that all humans are born free and equal in rights; the second one, which does not get as much attention, says that "Social distinctions can be based only on the common good."

Piketty does not attempt to specify a universal common good or what distinctions it could justify. He acknowledges it would be impossible. He does, however, raise the question of what common good is served when one heiress has a fortune of $40B and pays income tax on only $6M/year when that fortune grows by >$2B/year without her lifting a finger. She is the monkey who gets the grapes while the bulk of the population makes do with cucumber.

In the US, no one begrudges the fortunes of individuals who earned them, like Bill Gates, Steve Jobs, or Mark Zuckerberg. But heirs are a different story. If, as Beaumarchais put it, "for all this, you have taken the trouble to be born, and that's it," you don't get the same respect. At the same time, American parents want their children to inherit whatever wealth they have amassed. How far should the state go in interfering in this process for the common good?

It is not an easy question, but American statesmen from Thomas Jefferson to Theodore Roosevelt have answered that the state should interfere, and promoted estate taxes as a way to prevent the formation of a hereditary aristocracy.

Piketty's Analytical Approach

In the opening, Piketty explains that, early in his career, he was disillusioned in the US by economists building theoretical models without a foundation in data, and returned to France to work in an institution that is renowned for quantitative historians.

One of them, Pierre Chaunu, in known for having sifted through the records of goods coming in and out of Spanish ports for 200 years; another one, Jean-Pierre Peter, for dissecting the monthly reports from the local correspondents of the Royal Society of Medicine from 1750 onward. Needless to say, this patient mining of dusty archives yielded deep, new insights into the societies that produced them.

Piketty's research follows this intellectual tradition. He went through centuries of population, tax and inheritance statistics in multiple countries and made the data he used available on line. He did not, however, audit hundreds of years of individual tax returns. What he gives us as raw data in his online technical appendix is not truly raw but instead consists of summaries compiled by governments, international organizations, and other researchers.

Justice versus Practicality

In Piketty's book, far from being an invisible hand working for the common good, the market is a wild beast that must be tamed, by tax policies and regulation, using today's information technology to follow the money worldwide in real time.

Reading the book, you sense that the author feels excessive inequality to be immoral, but he falls short in exploring its practical consequences. The morality of inequality can be discussed forever without reaching any conclusion. As I see it, we should instead worry about its practical effects, particularly on political stability and economic growth

Wealth Distribution and Political Stability

Piketty does mention the corrupting effect on democracy of having a tiny minority controlling the bulk of the wealth. As Joseph Stiglitz put it, "economic inequality translates into political inequality, and political inequality yields increasing economic inequality."

Piketty also considers the disruptions of the two world wars and the great depression as the primary cause for the move towards greater equality in the rich countries of the mid-20th century. From this, he deduces that these moves were a temporary aberration, and that the return to higher levels of inequality since 1980 is simply a return to the pre-World War I dynamics of the economy.

What surprised me that he did not discuss policies adopted by many governments in many situations unrelated to the World Wars, that limited inequality for the explicit purpose of ensuring political stability, ranging from the focus on family farms in the early settlement of the US to the creation of a social safety net in late 19th century Germany under Bismarck, the New Deal in the US in the 1930s under FDR, and the improvements in working conditions and wages in China under Hu Jintao from 2005 to 2013.

These wealth redistribution policies were often pursued by conservative leaders who felt they were necessary to prevent social tensions from degenerating into revolutionary violence.

Piketty repeatedly quotes Jane Austen and Balzac for their depiction of society in early 19th century England and France. He doesn't quote Victor Hugo, who, in "Les Misérables," digresses extensively on the relationship between inequality and revolution. He knew first-hand: born right after the French revolution, he lived through multiple failed and successful insurrections like the one depicted in "Les Misérables."

From this perspective, what matters is not the morality of having the top 1% of the population own 40% of its wealth but the willingness of the remaining 99% to put up with it. It varies not only from one society to another, but over time in the same society.

Wealth Distribution and Wealth Creation

The second issue that I would have liked Piketty to discuss more is the relationship between inequality and growth. The often heard argument in the US is that any policy that redistributes wealth from the rich to the poor is punishing success and thereby discouraging citizens from pursuing it. As Piketty points out, international comparisons do not bear this out.

I have seen evidence that, in some cases, redistributive policies actually stimulate growth by bringing more consumers into the market. I would have liked Piketty to discuss the circumstances in which this happens and those in which it doesn't.

The Gini Index

Piketty does not like the Gini index, which is the most commonly used metric of inequality in the distribution of income, wealth or, for that matter, any additive quantity distributed among a set of entities, be they people, companies, cities or countries. Piketty's objection is that the Gini Index summarizes too much and that you need to drill down to the proportions owned by the top 0.1%, 1%, 10%, etc. in order to understand the situation.

While I agree that one number cannot account for the distribution of wealth or income in a society, I think of the Gini Index as a well defined statistic whose value is an invitation to drill down to specifics. In other fields, there are aggregate metrics that are poorly defined and misleading, like IQ and food calories, but I don't see it as being the case for the Gini Index and I don't understand Piketty's objection to looking at it.

Use of Graphics

Graphics are essential to communicate the information in this book, and an area where I feels it comes up short, both in chart content and in presentation.

More Than Just Time Series

With the exception of a few stacked bars, the charts in the book are all plots over time comparing the evolution of a ratio in different countries, by year or by decade. Charts are essential to communicate this kind of information and, interesting as these time series are, they leave me hungry for more sophisticated charts, showing for example, more than one variable.

Before reading Piketty, in Alberto Cairo's The Functional Art, I had found the following chart that showed the evolution of two variables over time -- the Gini index and the GDP, and made effective use of color to provide additional information:

The chart shows how rapid economic growth during the Lula 8-year presidency was concurrent with a reduction in inequality, as measured by the Gini index. It prompted me to plot the same chart for the US, which shows economic growth over the same period concurrent with an increase in inequality. It should be noted, however, that the highest Gini index value for the US is lower than the lowest in Brasil, and that the GDP figures are an order of magnitude higher.

I don't know what Piketty would make of these charts, but I would like to, and I think their analysis would have improved his book.

Most of Piketty's series end in 2010. On a few, like figure 12.5, the time scale extends to 2100, with all the points past 2010 being forecasts. The charts, however, do not include any separation between historical data and forecasts. The distinction is made in the text, but it really should be on the charts.

Visualization

The visuals are archaic, but I suspect it is not the author's fault but the publisher, in an effort to save money on printing. High-resolution color charts are not a luxury, and not for decoration. Colors can be used to provide more information, and fine lines enhance readability. For example, the following is a particularly hard-to-read chart from the book:

And this is what it turns into after a few edits:

It is still busy, but the lighter grid, while still visible, draws less attention away from the curves. The reader does not have to go back and forth between the legend box and the chart to tell with curve is for Italy or Japan, and doesn't have to rely on markers to tell them apart. You use this chart to highlight what all these countries have in common. To focus on, say, Japan, you reproduce the chart with all other countries' curves grayed out, as follows:

Yes. It is more expensive to print than monochrome charts but, if it is affordable for the work of a journalist like Alberto Cairo, shouldn't it be for Thomas Piketty?.

Production of the Book

The 2014, 700-page English translation in print is better produced than the original 2013 French version, which looks as if it had been made in 1975. At least, the English version has an index. The French original doesn't.

There is no point in looking for "Gini" in the index, because the book doesn't have one. Reading the book cover-to-cover was the only way to find out what Piketty thought on this subject. How can one, in 2013, put out a 950-page non-fiction book without an index? In 1975, indexing was tedious, manual work. With today's publishing technology, it is largely automated. There is no excuse for not having one.

Both versions only have monochrome charts, and the page layout is a throwback to a time when reader convenience was not a concern. Back when books were rare and precious, you could make readers plow through 300-word paragraphs with no space between them. They put up with it. Most don't anymore.

Conclusion: Read this book

The quibbles I have with the book are minor. As Patrick Moynihan said, "everyone is entitled to his own opinion, but not his own facts," and Piketty provides many facts, along with cautious inferences from these facts.