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Thomas Piketty Primer – ‘Capital in the 21st Century’ Explained

Thomas Piketty and his book Capital in the 21st Century are all over the place these days. And many investors are going to the usual places (Amazon and Wikipedia) to find out what all the fuss is about.

But to save you time, here’s a bunch of links to commentary on Capital in the 21st Century and its author Thomas Piketty to provide not just the basics of the book, but also context and commentary. That way, you’ll be able to know why you should care about Piketty and Capital — but also, what it means for businesses and investors.

Let’s start with the basics:

Who Is Thomas Piketty?

Thomas Piketty is a French economist who specializes in the study of economic inequality. He is the Associate Chair at the Paris School of Economics, so he is an academic, not a businessman or investor.

What Is “Capital in the 21st Century?”

Here’s a concise take from the Huffington Post on Thomas Piketty and Capital in the 21st Century:

“Piketty’s book… challenges the conservative economic theory of trickle-down economics, or the belief that a rising tide lifts all boats. In Piketty’s view, backed by centuries of data on wealth and economic growth, the typical outcome of unfettered capitalism is rising income inequality. Piketty says the world’s biggest economies have to do something, like impose a global tax on capital, to stop it.”

Why Does Thomas Piketty Think Inequality Is Out of Control?

Well, it’s hard to sum up a whole book in a few bullets, but here goes:

  • The ratio of wealth (cash that rich folks sit on) to income (wages and such) is rising in all developed countries.
  • The return on capital (via investments) will almost always outpace GDP growth rates, so the rich will get richer by investing while the poor will stay pretty poor thanks to comparatively weaker returns on labor.
  • An exterior force like World War II or the Great Depression could destroy capital, but that’s about it absent global government intervention… and we should all admit a big war or economic catastrophe is equally bad for poor folks. 

Thomas Piketty sums it up himself this way like a good academic, with a few ten-dollar words:

“When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.” (h/t Cullen Roche over at Pragmatic Capitalism)

Is This Risk of Perpetual Inequality Real?

nyt income inequality piketty
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Maybe. The New York Times actually just did a big piece on income inequality that showed America’s middle class is no longer the world’s richest and that more liberal (read: higher tax) countries have managed to fight back income inequality a bit better. Here’s a pretty amazing graphic to show how the poor are getting poorer, and the rich are getting much richer based on NYT research.

However, while Piketty makes a good case he is not without detractors. Some argue mainly that some income inequality is inevitable, and that Piketty is just engaging in class warfare.

Clive Crook at Bloomberg View offered this sharp-tongued criticism recently:

“This book wants you to worry about low growth in the coming decades not because that would mean a slower rise in living standards, but because it might cause the ratio of capital to output to rise, which would worsen inequality. In the frame of this book, the two world wars struck blows for social justice because they interrupted the aggrandizement of capital. We can’t expect to be so lucky again. The capitalist who squanders his fortune is a better friend to labor than the one who lives modestly and reinvests his surplus. In Piketty’s view of the world, where inequality is all that counts, capital accumulation is almost a sin in its own right.”

Also, many financially minded folks take issue with some of the basic assumptions — starting with the very title of the book and the definition of what “capital in the 21st century” should be considered to be. As James Galbraith pointed out, Thomas Piketty is hung up on the national capital/income ratios which are very much at the mercy of market values.

Still others take issue with the general concept that growth will be slow for a long time and rates of return on investing will remain strong. As Cullen Roche of Prag Cap put it:

“Now, I am a relatively optimistic person so I will try not to view this through rose colored glasses, but man has been making incredible progress for tens of thousands of years.  We have grown by leaps and bounds.  In the post-industrial revolution era global economic growth has averaged about 2.1%.  Since 1913 it has been even higher.  Piketty thinks this could drop close to 1% by the end of the century. He echoes the Robert Gordon thesis (the death of innovation, the end of growth).

I will always take the other side of this bet and I think it’s madness for anyone to do the opposite over long periods of time.”

Why Should You Care?

The current debate about income inequality — and the persistence of this trend — has captivated Wall Street, K Street and Main Street alike in recent years. So Capital in the 21st Century certainly a book about the most important issues of the moment. Thus, Thomas Piketty and his book have become a prop for political arguments.

Many on the right think, as Jordan Weissmann of Slate put it, that “America’s liberals have fallen for a Marx-referencing, Balzac-loving French intellectual who has proposed a worldwide tax on wealth.”

Or as Buttonwood’s Notebook in The Economist noted, “Democracy came about, in part, because the rising middle classes and industrial working classes demanded political recognition for their increased economic power. But if economic power has gone back to the rich, we may be sliding back into plutocracy, where government is controlled by the rich.”

If Piketty’s book continues to catch on and both politicians, labor unions, average Americans and others find inspiration in his ideas … well, it could seriously affect how the world views the wealthy.

And it could seriously affect how the world decides it needs to redistribute that wealth to fight the never-ending march of inequality.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. 

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