What Thomas Piketty doesn’t say

To say that Thomas Piketty’s “Capital in the Twenty-First Century” has caused a stir would be something of an understatement. Since its publication (in English) in March, political and economic commentators in the U.S. have talked about little else.

The book’s initial reception was ecstatic; a backlash duly followed. This is a good moment to ask what, if anything, has been learned.

Piketty’s study of inequality and its consequences has three main parts: first, a detailed history of wealth and inequality, going back centuries; second, a theory to explain the past and predict the future; and third, recommended policies arising from those predictions ― a future that Piketty calls “potentially terrifying.”

Even Piketty’s harshest critics concede that the information he and his collaborators have gathered is a remarkable achievement. Controversy has centered on the theory and the policies. Piketty predicts inexorably rising inequality leading to rule by oligarchs. This dismal outlook, he emphasizes, is not an accident: The logic of capitalism dictates it. Radical countermeasures, such as punitive income taxation and a global wealth tax for the very rich, will be needed to avert it.

Sadly, but perhaps inevitably, much of the subsequent commentary has arranged itself on ideological lines. The left delights equally in the book’s diagnosis and in its suggested remedies; the right is no less appalled by both. This polarized discussion is entrenching prejudices rather than advancing knowledge.

A notable exception is a review by former Treasury Secretary Larry Summers for the journal Democracy. Summers says the first part of the book merits a Nobel Prize in its own right, but he expresses great reservations about the rest of it. Ever-worsening inequality is not an iron law of capitalism, Summers explains, but a conjecture ― and a questionable one. For Piketty’s prediction to be correct, capital has to keep on accumulating faster than the economy expands. It doesn’t always ― especially when, say, much of it is invested in housing and is consumed by owner-occupiers instead of being reinvested.

Piketty has focused debate on a hugely important subject: inequality, which, as he shows, has increased in the U.S. and in other countries, and that’s cause for concern. But his flawed theory is a poor guide to the future scale of the problem.

The book also has surprisingly little to say about why inequality is a problem to begin with. Piketty has a dystopian vision of oligarchic rule. But plutocrats come in all shapes and sizes: They may be liberal, conservative or nonaligned. Their interests differ and so do their values. Yes, money may have too much influence on U.S. politics, but that is as much a failure of the political system as the result of inequality.

Too much inequality, especially the kind transmitted from one generation to the next, is a problem not because it threatens to put tyrants in power. The better objection is that it militates against success on merit, which is the organizing principle of a just society.

That’s why it’s important, in considering steps to reduce inequality, to focus on promoting opportunity and upward mobility as much as requiring the rich to pay their fair share of taxes. The trouble with Piketty’s suggested tax reforms isn’t just that they’re unlikely to be taken up ― as he admits ― but that they ignore opportunity altogether.

In addition, little of the recent surge in U.S. inequality is due to the long-term mechanics of capital accumulation that Piketty describes. He admits this, too. Technology and globalization have raised the incomes of “superstars.” Less benignly, top managers in finance, especially, have tapped market power and implicit subsidies to boost their pay. Attacking those distortions and closing tax loopholes should be policy priorities.

It’s great that people are arguing about the causes and consequences of inequality, and Piketty deserves credit for bringing new facts and ideas to the discussion. His preferred agenda is nonetheless a distraction. For a discussion of the policies that would advance a fairer and more prosperous society, it’s necessary to look elsewhere.

(Bloomberg)