The significance of Thomas Piketty’s Capital in the Twenty-First Century
Thomas Piketty's recent book Capital in the Twenty-First Century has captured the popular imagination in a way very few economics books - and almost none that are 700 pages long - have managed to do previously. What is it about Piketty's book which has made it a bestseller where many other cogent broadsides against neoliberalism have remained niche commodities? I would venture to suggest that the feature of Piketty's argument that makes it special is his assertion that inequalities of wealth in developed countries will tend to increase inexorably in the 21st century if the market is left unchecked by government intervention because of the tendency for 'r' - the rate of return on capital - to be higher than 'g' - the overall growth rate of the economy. Like Einstein's e=mc², Piketty's 'r>g' is that rare thing - a scientific formula which has the ability to cross over into the popular consciousness. And its implication is that the wealthiest 1% of the population - who own around 13% of wealth in the UK (according to the latest figures from the Office for National Statistics' Wealth and Assets Survey), and probably a lot more if offshore wealth holdings are taken into account - will own an even higher percentage of total wealth in the future.
Much of Piketty's book is concerned with empirical evidence for his contention that wealth inequalities are increasing. Piketty's data work has been heavily criticised by some commentators. In particular, Financial Times economics editor Chris Giles argued that the wealth inequality data for the UK and other developed countries does not support Piketty's argument that wealth inequalities had increased since 1980. In a recent Guardian datablog post, I examined the UK wealth data and concluded that GIles's criticisms were largely misplaced because he had failed to take account of discrepancies between the different data sources used to measure wealth inequality at different points in the last 50 years. Some of these sources produce much lower estimates of wealth inequality than others. The trend since 1980 has been towards increased wealth inequality in the UK if we just look at changes from year to year in each individual series. But Chris Giles, to take one example from the data, uses figures from the ONS Wealth and Assets Survey for 2010 - which gives a much lower estimate of wealth inequality than the data from Inland Revenue and HMRC for the 1970s, 80s, 90s and 2000s - and argues that the WAS data show an decrease in *actual* wealth inequality for the UK in 2010 compared to the 1980s. This result is entirely driven by changes in the way wealth is measured rather than anything happening to the UK wealth distribution in the real world. By contrast, although Piketty makes minor spreadsheet mistakes (as pointed out by Chris Giles) these do not in any way compromise his fundamental findings.
The attack by the FT doesn't diminish the power of Piketty's insight, but it does highlight the difficulties involved in using existing data sources to analyse wealth inequalities. The Wealth and Assets Survey is designed to give an accurate measure of the distribution of wealth across the whole population, and probably succeeds for the bottom 98 or 99%. The problem is that to measure wealth inequality accurately we need detailed data for the top 1 or 2 percent - and even more so, for the top 0.001 percent - the richest few hundred families. It is unlikely that any of these households are in the WAS, but according to the Sunday Times Rich List (which uses a completely different methodology to measure wealth) their total wealth is £520 billion - around 6% of the ONS's total wealth estimate for the whole UK. Hence it is likely that WAS on its own misses out a large proportion of wealth at the very top of the distribution and leads to an underestimate of wealth inequality. To get a real picture of how wealth inequality is evolving we need to combine survey data with other investigative techniques (such as are used by the Sunday Times, Forbes et al) to get the full picture. We can also see the consequences of increased wealth inequality in terms of inequalities of *power* even if we can't see wealth directly. This is particularly true in the US, where endemic corporate lobbying and the abolition of restrictions on campaign contributions mean that the political process is more unbalanced in terms of furthering the interests of those with the most money to spend on it than it has ever been. But the effects are also highly visible in the UK, with the Conservatives receiving huge donations from wealthy individuals and big businesses in exchange for pursuing a neoliberal deregulatory agenda. While Piketty's analysis of the wealth distribution is very useful, we can get a good idea of the growing power of the super-rich in our economy and politics just by looking around us.
- Thomas Piketty will be in conversation with Lord Stewart Wood in a parliamentary event hosted by Class on 16 June.