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Reviewed by Donald J. Boudreaux

Thomas Piketty's Capital in the Twenty-First Century might soon stand with Karl Marx's Capital, which inspired its title, as one of the most influential economic masterworks of the past 150 years. But sad to say, this 696-page tome, ably translated by Arthur Goldhammer, is no more enlightening about capitalism in the 21st century than Marx's Capital was about capitalism in the 19th century.

As a publishing phenomenon alone, the Paris School of Economics professor's treatise, which has been hailed by three Nobel laureates—Paul Krugman, Joseph Stiglitz, and Robert Solow—commands our attention. It is also noteworthy as a symptom of a perverse ideology that seems to dominate progressive thinking, including that of President Barack Obama and President François Hollande of France, and of a flawed method of economic analysis.

Many of us care about whether, and to what extent, the broad masses of people have improved absolutely their material conditions of life. While Piketty (pronounced "PEEK-et-tee") doesn't entirely ignore that question, he focuses instead on the causes and cures of relative disparities in monetary income and wealth across groups of people and over centuries. Some ways of narrowing those disparities, such as punitive rates of taxation, might run the risk of dragging down everyone, rich and poor alike. But for Piketty, the importance of diminishing monetary inequalities is so monumental that he all but totally ignores such risks.

Capital in the Twenty-First Century by Thomas Piketty

Belknap Press

696 pages, $39.95

Piketty's method of doing economics involves frequent grand proclamations about "social justice" and economic "evolutions," but he offers no analyses of the dynamics of individual decision-making, often referred to as "microeconomics," that should be central to the issues he raises.

The author hovers instead in the economy's stratosphere, gazing down on the only phenomena visible from such a distant perch—big statistics such as population growth or the share of national income "claimed" by the very rich. Revealingly, Piketty writes of income and wealth as being claimed or "distributed," never as being earned or produced. The resulting statistics are too aggregated—too big-picture—to reveal what is happening to individuals on the ground.

Instead of actually looking at the behavior behind his statistics, the author serves up ad hoc and ultimately unpersuasive theories about the "behavior" of his big statistics themselves, including such hulking impersonal aggregates as the return to capital and the ratio of national wealth to national income. He imagines that such aggregates interact in robotic fashion through a logic of their own, unmoved by individual human initiative, creativity, or choice.

CONSIDER PIKETTY'S CENTRAL theory, that the rate of return on capital, which he labels "r," tends to be greater than the rate of economic growth, or "g." For the author, the fact that r runs faster than g—by several percentage points, by his reckoning—alone seals capitalism's fate, because it implies that owners of capital must get increasingly richer than nonowners. Because capital ownership is itself unevenly "distributed" across society, wealth and income disparities must in turn worsen, "impoverishing" the middle classes and the poor alike, while giving a relatively small number of rich elites both vast resources and disproportionate influence over government policy-making.

Despite the logical implications of return on capital being greater than economic growth, Piketty doesn't think that the plutocraticization of society is inevitable. First of all, it can be arrested and even reversed by calamities such as world wars or Soviet-style communism, the destructive effects of which fall disproportionately upon the rich. Alas, he opines that the welcome consequences of such correctives are only temporary.

But another, more lasting remedy is readily at hand: hard-hitting taxation. Piketty calls for greater and more progressive taxation, not only of incomes—at a top bracket of at least 80%—but also of wealth, preferably to be enacted globally, lest differential tax burdens prompt plutocrats to flee from high-tax to low-tax jurisdictions. While he isn't optimistic about the likelihood of the necessary government cooperation, he's willing to settle for whatever steps more-enlightened governments might take to soak the rich—and especially such steps as might be accompanied by greater cross-border sharing of information about bank accounts and other investments owned by foreigners.

Flaws aplenty mar Piketty's telling of the capitalist saga, flaws that spring mainly from his disregard for basic economic principles. None looms larger than his mistaken notion of wealth.

Every semester, I ask my freshman students how wealthy they would be if they each were worth financially as much as Bill Gates but were stranded with all those stocks, bonds, property titles, and bundles of cash alone on a desert island. They immediately see that what matters is not the amount of money they have but, rather, what that money can buy. No principle of economics is more essential than the realization that, ultimately, wealth isn't money or financial assets but, rather, ready access to real goods and services.

Piketty seems barely aware of this reality, focusing on differences in people's monetary portfolios. He therefore ignores the all-important supply side: what people—rich, middle class, and poor—can buy with their money. Yet, to the extent that inequalities are at all relevant, the only ones that really matter are inequalities in access to real goods and services for consumption. Bill Gates' living quarters are larger and more elegant than mine and, I dare say, yours. But even the poorest people in market economies have seen their ability to consume skyrocket over time. And the poorer they once were, the greater has been the enhancement of their ability to consume.

If we follow the advice of Adam Smith and examine people's ability to consume, we discover that nearly everyone in market economies is growing richer. We also discover that the real economic differences separating the rich from the middle class and the poor are shrinking. Reckoned in standards of living—in ability to consume—capitalism is creating an ever-more-egalitarian society.

THE U.S. IS THEbête noir of Piketty and other progressives obsessed with monetary inequality. But middle-class Americans take for granted their air-conditioned homes, cars, and workplaces—along with their smartphones, safe air travel, and pills for ailments ranging from hypertension to erectile dysfunction. At the end of World War II, when monetary income and wealth inequalities were narrower than they've been at any time in the past century, these goods and services were either available to no one or affordable only by the very rich. So regardless of how many more dollars today's plutocrats have accumulated and stashed into their portfolios, the elite's accumulation of riches has not prevented the living standards of ordinary people from rising spectacularly.

Furthermore, these improvements in real living standards have been undeniably greater for ordinary folks than for rich ones. In 1950, Howard Hughes and Frank Sinatra could easily afford to pay for the likes of overnight package delivery, hour-long transcontinental telephone calls, and air-conditioned homes. For ordinary Americans, however, these things were out of reach. Yet, while today's tycoons and celebrities still have access to such amenities, so, too, do middle-class and even poor Americans. This shrinking gap between the real economic fortunes of the rich and the rest of us should calm concerns about the political dangers of the expanding inequality of monetary fortunes.

Flaws in the author's stratospheric viewpoint are also on display when we try to think in human terms about the inevitability of the return on capital, at 4% to 5%, exceeding the growth rate of economy, at 1% to 1.5%. According to the author, that gap of a few percentage points, when compounded over many years, can render economic inequality "potentially terrifying." But two key factors make it quite difficult for that tendency to persist for very long in the lives of most individuals.

To begin with, advance and retreat, rather than permanence, tends to characterize the pattern of most successful businesses. Sooner or later, the entry of competitors and of changing consumer tastes curbs their growth, when not reducing their size absolutely or even bankrupting them. In 2013 alone, 33,000 businesses in the U.S. filed for bankruptcy, a typical figure for a year of economic expansion. Second, and more importantly, successful capitalists rarely spawn children and grandchildren who match their elders' success; there is regression toward the mean. Note that the terrifyingly successful capitalist Bill Gates will likely not be succeeded by younger Gateses prepared to capitalize on his success.

Even leave aside plans like those of Gates and Warren Buffett to give away much of their fortunes, or the redistributive role of philanthropy generally. The empirical data suggest that turnover is the norm among wealthy capitalists, rather than the building of a permanent plutocracy. The IRS' list of "Top 400 Individual Tax Returns" provides evidence of instability at the top. Over the 18 years from 1992 through 2009, 73% of the individuals who appeared on that list did so for only one year. Only a handful of individuals made the list in 10 or more years. Wealth gets diluted over time when left to multiple heirs, and is further diluted by estate taxes, philanthropy, and changes in market conditions.

PIKETTY'S PRONOUNCEMENTS about the stability of capitalist wealth deny such realities. He writes, for example, that "Capital is never quiet: it is always risk-oriented and entrepreneurial, at least at its inception, yet it always tends to transform itself into rents as it accumulates in large enough amounts—that is its vocation, its logical destination." Read: The risky, entrepreneurial element in business formation eventually recedes in importance until the business naturally evolves toward its "logical destination"—that of a perpetual cash machine that regularly spits out "rents."

In a similar vein, Piketty observes, "[W]hat could be more natural to ask of a capital asset than that it produce a reliable and steady income: that is in fact the goal of a 'perfect' capital market as economists define it." It may be "natural" to ask this of a capital asset. But only economists who talk of "perfect" capital markets are naive enough to expect a "yes" answer.

If Piketty really believes in a "perfect" capital market yielding capitalists reliable and steady income, he might wonder why the bankrupt book-selling giant Borders is no longer around to sell his books, while Amazon.com has grown up to challenge all manner of bricks-and-mortar retailers. In his world, capitalism is a system of profits; in the real world, it's a system of profit and loss.

Piketty's disregard for basic economic reasoning blinds him to the all-important market forces at work on the ground—market forces that, if left unencumbered by government, produce growing prosperity for all. Yet, he would happily encumber these forces with confiscatory taxes.

Commendably, though, he expresses concern about the potential for his tax regime to expand the size of government: "[B]efore we can learn to efficiently organize public financing equivalent to two-thirds to three-quarters of national income," he cautions, "it would be good to improve the organization and operation of the existing public sector." It would indeed be "good" to make such improvements. I'd like to imagine that, if Karl Marx were alive today, he'd sadly inform his less-experienced colleague that, 150 years ago, socialists had that very same idea. It did not work out as hoped.

DONALD J. BOUDREAUX is professor of economics at George Mason University and holds the Martha and Nelson Getchell Chair at the Mercatus Center.

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