[Original review is here. Don’t worry, people who had interesting comments on the review – I’ll try to get a comments highlights thread up eventually.]

For Ricardo, who published his Principles of Political Economy and Taxation in 1817, the chief concern was the long-term evolution of land prices and land rents. Like Malthus, he had virtually no genuine statistics at his disposal. He nevertheless had intimate knowledge of the capitalism of his time. Born into a family of Jewish financiers with Portuguese roots, he also seems to have had fewer political prejudices than Malthus, Young, or Smith. He was influenced by the Malthusian model but pushed the argument farther. He was above all interested in the following logical paradox. Once both population and output begin to grow steadily, land tends to become increasingly scarce relative to other goods. The law of supply and demand then implies that the price of land will rise continuously, as will the rents paid to landlords. The landlords will therefore claim a growing share of national income, as the share available to the rest of the population decreases, thus upsetting the social equilibrium. For Ricardo, the only logically and politically acceptable answer was to impose a steadily increasing tax on land rents. This somber prediction proved wrong: land rents did remain high for an extended period, but in the end the value of farm land inexorably declined relative to other forms of wealth as the share of agriculture in national income decreased. Writing in the 1810s, Ricardo had no way of anticipating the importance of technological progress or industrial growth in the years ahead. Like Malthus and Young, he could not imagine that humankind would ever be totally freed from the alimentary imperative.

One underappreciated feature of Piketty is his engaging presentation of economic history. A constant feature of the theorists he discusses is that they are all brilliant thinkers, they all follow the trends of their time to their obvious conclusions in ways deeper and more insightful than their contemporaries – and they all miss complicated paradigm shifts that make the trends obsolete and totally ruin their theories. Rationalists take note.

Like Ricardo, Marx based his work on an analysis of the internal logical contradictions of the capitalist system. He therefore sought to distinguish himself from both bourgeois economists (who saw the market as a self-regulated system, that is, a system capable of achieving equilibrium on its own without major deviations, in accordance with Adam Smith’s image of “the invisible hand” and Jean-Baptiste Say’s “law” that production creates its own demand), and utopian socialists and Proudhonians, who in Marx’s view were content to denounce the misery of the working class without proposing a truly scientific analysis of the economic processes responsible for it.7 In short, Marx took the Ricardian model of the price of capital and the principle of scarcity as the basis of a more thorough analysis of the dynamics of capitalism in a world where capital was primarily industrial (machinery, plants, etc.) rather than landed property, so that in principle there was no limit to the amount of capital that could be accumulated. In fact, his principal conclusion was what one might call the “principle of infinite accumulation,” that is, the inexorable tendency for capital to accumulate and become concentrated in ever fewer hands, with no natural limit to the process. This is the basis of Marx’s prediction of an apocalyptic end to capitalism: either the rate of return on capital would steadily diminish (thereby killing the engine of accumulation and leading to violent conflict among capitalists), or capital’s share of national income would increase indefinitely (which sooner or later would unite the workers in revolt). In either case, no stable socioeconomic or political equilibrium was possible. Marx’s dark prophecy came no closer to being realized than Ricardo’s. In the last third of the nineteenth century, wages finally began to increase: the improvement in the purchasing power of workers spread everywhere, and this changed the situation radically, even if extreme inequalities persisted and in some respects continued to increase until World War I. The communist revolution did indeed take place, but in the most backward country in Europe, Russia, where the Industrial Revolution had scarcely begun, whereas the most advanced European countries explored other, social democratic avenues—fortunately for their citizens. Like his predecessors, Marx totally neglected the possibility of durable technological progress and steadily increasing productivity, which is a force that can to some extent serve as a counterweight to the process of accumulation and concentration of private capital. He no doubt lacked the statistical data needed to refine his predictions. He probably suffered as well from having decided on his conclusions in 1848, before embarking on the research needed to justify them.

As above. I didn’t previously understand exactly what Marx meant by “capitalists digging their own grave” or why it didn’t come true. In general, I seem to have missed how recent the idea of “economic growth” was. I don’t really understand how 19th- and even some 20th- century economists could fail to understand this, though it seems like they had some complicated thoughts on this issue – see eg this article’s descriptions of Smith’s, Ricardo’s, and Mill’s ideas of the “steady state economy”. Read history of economics backwards!

(but for a contrary perspective, see this comment thread)

In any event, the data that Kuznets collected allowed him to calculate the evolution of the share of each decile, as well as of the upper centiles, of the income hierarchy in total US national income. What did he find? He noted a sharp reduction in income inequality in the United States between 1913 and 1948. More specifically, at the beginning of this period, the upper decile of the income distribution (that is, the top 10 percent of US earners) claimed 45–50 percent of annual national income. By the late 1940s, the share of the top decile had decreased to roughly 30–35 percent of national income. This decrease of nearly 10 percentage points was considerable: for example, it was equal to half the income of the poorest 50 percent of Americans.13 The reduction of inequality was clear and incontrovertible. This was news of considerable importance, and it had an enormous impact on economic debate in the postwar era in both universities and international organizations. Malthus, Ricardo, Marx, and many others had been talking about inequalities for decades without citing any sources whatsoever or any methods for comparing one era with another or deciding between competing hypotheses. Now, for the first time, objective data were available. Although the information was not perfect, it had the merit of existing. What is more, the work of compilation was extremely well documented: the weighty volume that Kuznets published in 1953 revealed his sources and methods in the most minute detail, so that every calculation could be reproduced. And besides that, Kuznets was the bearer of good news: inequality was shrinking.

Another good rationalist lesson! If your conclusion from the stories above was “never try to just reason things out from first principles, wait until you get empirical data”, then remember the lesson of Kuznets, who got 35 years of empirical data, drew all of the most reasonable conclusions from it, but happened to be working in an atypical economic period and so got his conclusions exactly backwards.

In slowly growing economies, past wealth naturally takes on disproportionate importance, because it takes only a small flow of new savings to increase the stock of wealth steadily and substantially. If, moreover, the rate of return on capital remains significantly above the growth rate for an extended period of time (which is more likely when the growth rate is low, though not automatic), then the risk of divergence in the distribution of wealth is very high. This fundamental inequality, which I will write as r > g (where r stands for the average annual rate of return on capital, including profits, dividends, interest, rents, and other income from capital, expressed as a percentage of its total value, and g stands for the rate of growth of the economy, that is, the annual increase in income or output), will play a crucial role in this book. In a sense, it sums up the overall logic of my conclusions. When the rate of return on capital significantly exceeds the growth rate of the economy (as it did through much of history until the nineteenth century and as is likely to be the case again in the twenty-first century), then it logically follows that inherited wealth grows faster than output and income.

The shortest and clearest presentation Piketty gives of his r > g inequality.

The dynamics and structure of inequality look very different in a country whose population increases by a factor of 100 compared with a country whose population merely doubles. In particular, the inheritance factor is much less important in the former than in the latter. It has been the demographic growth of the New World that has ensured that inherited wealth has always played a smaller role in the United States than in Europe. This factor also explains why the structure of inequality in the United States has always been so peculiar, and the same can be said of US representations of inequality and social class. But it also suggests that the US case is in some sense not generalizable (because it is unlikely that the population of the world will increase a hundredfold over the next two centuries) and that the French case is more typical and more pertinent for understanding the future.

Contrary to the popular consensus today, the American Dream was very real for most of America’s history. This was less due to American ideals and institutions, and more the fact that America (as a new country) had less time to accumulate a rentier class, which takes a couple generations for the fortunes to really multiply. And as a country with a very high population growth rate (remember the average colonial New England family had like 10 kids), any wealth that did get accumulated was quickly diluted over a bunch of children instead of inherited as a chunk. This was at least true in the North and frontier – the South, which inherited a lot of the worst parts of the 1600s English upper-class, got a society along the lines of the European aristocratic model with rentier plantation owners. Traditional models of labor-capital split generally fail to capture this because much Southern wealth was in the form of slaves, ie labor turned into a form of capital, which confuses the models. But as for the rest of the country, Piketty approvingly quotes Tocqueville’s description of America as “a land without capital”.

American exceptionalism lasted until the late 1800s/early 1900s. As much as people like to make fun of Horatio Alger stories, they were an exaggerated but accurate (or at least more accurate) portrayal of the society of the day. As America aged, got time to accumulate large multigenerational fortunes, and lowered its birth rate, its inequality and intergenerational-mobility became as bad as or worse than Europe’s, depending on what metrics you use.

I belong to a generation that turned eighteen in 1989, which was not only the bicentennial of the French Revolution but also the year when the Berlin Wall fell. I belong to a generation that came of age listening to news of the collapse of the Communist dictatorships and never felt the slightest affection or nostalgia for those regimes or for the Soviet Union. I was vaccinated for life against the conventional but lazy rhetoric of anticapitalism, some of which simply ignored the historic failure of Communism and much of which turned its back on the intellectual means necessary to push beyond it. I have no interest in denouncing inequality or capitalism per se—especially since social inequalities are not in themselves a problem as long as they are justified, that is, “founded only upon common utility,” as article 1 of the 1789 Declaration of the Rights of Man and the Citizen proclaims. (Although this definition of social justice is imprecise but seductive, it is rooted in history. Let us accept it for now. I will return to this point later on.) By contrast, I am interested in contributing, however modestly, to the debate about the best way to organize society and the most appropriate institutions and policies to achieve a just social order. Furthermore, I would like to see justice achieved effectively and efficiently under the rule of law, which should apply equally to all and derive from universally understood statutes subject to democratic debate.

Including this to defend Piketty against accusations that he is a communist. He’s obviously some stripe of leftist, and his writing can be infuriatingly preachy in a very specifically leftist way at times, and if you are a rightist reading him you will probably hate him for totally preventable tone-related reasons – but he is a lot more moderate than his critics give him credit for, and shares the capitalist-but-concerned-about-inequality position that I and many readers here can probably identify with.

To a first approximation, the residents of [modern First World] countries own as much in foreign real estate and financial instruments as foreigners own of theirs.

Piketty helped me better understand the anti-colonialist position. It isn’t just that the colonizers were traditionally oppressive in the sense of taking over the government and committing human rights violations (though of course many were). It’s that – and this is the part I didn’t understand even when people chanted it at me as a slogan ad nauseum – colonialism was a partly a form of capitalism. Part of what “the British colonized Africa” means is that they set up a lot of companies in Africa with British people as the shareholders. Those companies went and did company things – some evil and rights-violating, others normal and productive – but the profits all went to British shareholders. Extended forever into time, that means that if the labor-capital split in Africa is X, then X% of Africa’s production will go to forever go to Britain, and only 1-X% to Africa.

One might argue that Britain invested money in developing Africa, which can only work with the prospect of repayment on normal investment terms. And one might even argue that it’s no worse for the average African laborer to have X% of his country’s money go to British elites he doesn’t know vs. than to African elites he doesn’t know. But this would be overstating the case – the British elites spend their money primarily in Britain, further developing Britain’s economy, whereas the African elites could be expected to spend their money mostly in Africa. And since (absent appropriation) a capitalist’s ownership of capital lasts forever, the British do a one-time positive action (investing in Africa) that produces an eternal negative action (having them get to drain some of Africa’s money forever). Although it’s not provably/necessarily true, in real life this is probably worse for Africa than leaving it alone and/or letting it invite foreign investment on the much better terms it could certainly have gotten if its governments weren’t controlled by the same people it was trying to negotiate with.

This also helps me understand the “colonialism still hurts countries today” position better.

In the novels of Jane Austen and Honore de Balzac, the fact that land (like government bonds) yields roughly 5% of the amount of capital invested (or, equivalently, that the value of capital corresponds to to roughly twenty years of annual rent) is so taken for granted that it often goes unmentioned.

Piketty’s habit of supporting his statistics with quotes from Jane Austen and other period novelists is endearing. And one thing he mentions again and again is that throughout the 18th and 19th century, novelists were frank about money in a way that sounds strange to modern ears. Austen and her contemporaries would introduce a character by saying “He made such-and-such a number of pounds per year” to help their audiences understand the social class they was talking about, and sometimes devote pages to exploring a character’s finances in realistic detail to add color to their financial problems or lack thereof.

He speculates that this is because, for centuries, there was little-to-no inflation or other dramatic changes in the economy. This gave the meaning of money ample time to percolate down into the culture. Everyone knew (and had always known) that X amount of pounds meant you were well-off, and novelists were confident that if posterity read their book fifty years later, the message would still be clear.

This stasis extended to international exchange rates, which never changed. “In the nineteenth and early twentieth century, everyone knew that a pound sterling was worth about 5 dollars, 20 marks, and 25 franks.”

This is fascinating, but I’m surprised by Piketty’s theory – surely novelists don’t write mainly for posterity. If people within the next five years understand what they meant, surely that’s good enough? But why did past novelists go into so much detail about finances in a way that sounds bizarre to modern ears?

In the classic novels of the nineteenth century, wealth is everywhere, and no matter how large or small the capital, or who owns it, it generally takes one of two forms: land or government bonds.

The 19th-century aristocrat living off his estates is a well-known figure in the popular imagination, but I was surprised to learn of his equally-common contemporary, the person living off government bonds. The UK government issued so many bonds to pay for the Napoleonic Wars that it created an entire class of bond tycoons who lived off the interest for generations. To its credit (and inconceivably to modern ears), the British government just plodded along paying its debt slowly but surely, and finally finished sometime around 1900!

This system worked because interest on government bonds was about 4% to 5% – much higher than today. Piketty doesn’t really explain why the rate of return changed. It also worked because nobody realized inflation was even a thing. After inflation started – and especially after a few bouts of hyperinflation – people quickly stopped living off government bonds except as part of a diversified portfolio.

This historical record is fundamental for a number of reasons. First, it enables us to understand why nineteenth-century socialists, beginning with Marx, were so wary of public debts, which they saw – not without a certain perspicacity – as a tool of private capital.

In today’s climate where the left gets accused of tax-and-spend and the right of cruel austerity, it’s interesting to learn that the 19th-century debate was exactly the opposite, and public debt was viewed as taking money from the people (in the form of taxation) to give to the rich (in the form of interest). I think this change might also be an effect of interest rates going down, plus more money going to social programs, plus more taxes coming from the rich, plus an optimism that inflation will eventually destroy the debt so there’s less reason to worry.

Piketty seems uncertain that the left remains correct in its about-face: “This ‘progressive’ view of public debt retains its hold on many minds today, even though inflation has long since declined to a rate not much above the nineteenth century’s, and the distributional effects are relatively obscure.”

Many traditional aristocratic societies were based on the principle of primogeniture: the eldest son inherited all (or at any rate a disproportionately large share) of the family property so as to avoid fragmentation and to preserve or increase the family’s wealth. The eldest son’s privilege concerned the family’s primary estate in particular and often placed heavy constraints on the property: the heir was not allowed to diminish its value and was obliged to live on the income from the capital, which was then conveyed in turn to the next heir in the line of succession, usually the eldest grandson. In British law this was the system of “entails” (the equivalent in French law being the system of substitution hereditaire under the Ancien Regime)… The inheritance law that derived from the French Revolution and the Civil Code that followed rested on two main pillars: the abolition of substitution hereditaires and priomgeniture, and the adoption of the principle of equal division of property among brothers and sisters (equipartition). This principle has been applied strictly and consistently since 1804: in France, the quotite disponible (that is, the share of the estate that parents are free to dispose of as they wish) is only a quarter of total wealth for parents with three or more children, and exemption is granted only in extreme circumstances (for example, if the children murder their stepmother). It is important to understand that the new law was based not only on a principle of equality (younger children were valued as much as the eldest and protected from the whims of the parents) but also on a principle of liberty and economic efficiency. In particular, the abolition of entails, which Adam Smith disliked and Voltaire, Rousseau, and Montesquieu abhorred, rested on a simple idea: this abolition allowed the free circulation of goods and the possibility of reallocating property to the best possible use in the judgment of the living generation, despite what dead ancestors may have thought.

Primogeniture make sense in a perverse way. If Family X gives everything to the eldest children, but Family Y splits it equally, then a few generations down Family X will retain a line of nobles with vast wealth, whereas Family Y will be much poorer and maybe removed from the decision-making process. I’m not sure why you would enshrine into law that everyone has to do this, though – surely the winning move is to enforce primogeniture in your own family but hope your rivals are dumb enough to split their fortunes equally. Maybe the goal is to bind your own great-grandson, over whom you are otherwise powerless.

I’m surprised that great lords didn’t have the right to sell their capital. I guess I never hear about this, but it seems surprising that people were around to stop them.

The last paragraph is one of the few good arguments I’ve heard for constraining inheritance. I always get angry when I hear about rich people who clearly wanted one good child (or someone who wasn’t a child at all) to get their fortune, only to have this contested by a bunch of ungrateful children the rich person hated who believe they’re entitled to the money by birth. But Piketty makes an argument for a compelling social reason this might be enforced (although of course you could solve this just by saying rich people have to split their money at least n ways, and your ungrateful children who you hate don’t have to be one of those n).

I wonder if there is any history of noble families deliberately having only one child to avoid forced splitting of their fortune.

Several generations grew up [under conditions of inheritance barely mattering at all], in particular the baby boom generation, born in the late 1940s and early 1950s, many of whom are still alive today, and it was natural for them to assume that this was the “new normal”. Conversely, younger people, in particular those born in the 1970s and 1980s, have already experienced (to a certain extent) the important role that inheritance will once again play in their lives and the lives of their relatives and friends. For this group, for example, whether or not a child receives gifts from parents can have a major impact in deciding who will own property and who will not.

I am part of the generation born in the 1970s and 1980s, and though my parents have been very helpful to me in many ways, inheritance as such has not mattered to me or any of my friends at all, because our parents are still alive.

People are living longer today than they did in the golden age of inheritance, and if 19th century nobles could expect to come into the family fortune in their 30s or 40s, modern people have to wait until their 50s and 60s. I have a few patients in this position, and what it usually means is that there are a few months of constant legal crisis as they fight with siblings and tax assessors, and sort through hundreds of old boxes, and try to prepare a house for sale, and when everything’s done with and the lawyers have taken their share, they get a decent but not game-changing amount to add to their retirement savings.

Because this happens so late, nobody can really say “I’m not going to go to school and pursue a career; after all, I’m going to inherit a fortune soon enough”. They can’t even avoid saving for retirement: both my parents have reached retirement age, but both my grandmothers are still alive and well.

I wonder if, as inheritance becomes more important, some market for solutions to this kind of problem will come up. Imagine an “inheritance insurance” company, which gives people with well-off parents (let’s say) enough to make a down payment on a house in their 20s/30s in exchange for a much larger amount from their inheritance later on, with some kind of built-in agreement not to worry if their parents’ house burns down the next day and they’re left with nothing. My guess is there are too many ordinary risks and moral risks here for this to work, but it’s interesting to think about.

Concretely, Harvard currently spends nearly $100 million a year to manage its endowment.

Part of Piketty’s section on how the super-rich (including colleges) get higher returns to their investment than everyone else. A good reminder that you should not donate to colleges.

The situation has been very different since the 1980s: with per capita income growth of just over 1 percent a year, no one wants large and steady tax increases, which would mean even slower if not negative income growth.

Another part of Piketty’s macroeconomic-history explanation of political trends: just after WWII, catch-up growth was so intense that everyone had more than they expected and it was easy to convince people to put some of it into the construction of a social welfare state (easier in Europe and Japan, which were most devastated by the war, than in the US and UK). As growth slowed down, people were no longer willing to give the government so much money. Countries with large welfare states mostly maintained them due to the ratchet effect, but expanding the welfare state further has become a much harder sell (I think I am understanding this right).

This is an interesting counterclaim to the intuitive story that the welfare state grows in bad times because more people need/want welfare. I don’t know if research has been done to see which of these is true. Plausibly sudden crises are conducive to welfare expansion, but a long run of predictably poor growth is bad for it?

This suggests we should see very little welfare state expansion in the near future, which does fit current data, although it’s hard to square with the sudden attractiveness of pro-welfare-state-expansion candidates like Bernie Sanders and Jeremy Corbyn.

Recent research has shown that the decline in government receipts in the poorest countries in 1980 – 1990 was due to a large extent to a decrease in custom duties, which had brought in revenue equivalent to about 5% of national income in the 1970s. Trade liberalization is not necessarily a bad thing, but only if it is not peremptorily imposed and only if the lost revenue can gradually be replaced by a strong tax authority capable of collecting new taxes and other substitute sources of revenue.

The claim being that developing countries, who may not be good at collecting income taxes, were hard-hit by trade liberalization because of direct revenue costs. I hadn’t heard this argument before and I wonder if anyone has calculated whether this effect outweighs any positive economic effects that liberalization could have. I know that about 100% of economists who are not working for the Trump administration at this exact moment are against tariffs, but I don’t know if maybe that’s just from the First World perspective.

It was the United States that was the first country to try [tax] rates above 70%, first on income in 1919-1922 and then on estates in 1937 – 1939. When a government taxes a certain level of income or inheritance at a rate of 70 or 80 percent, the primary goal is obviously not to raise additional revenue (because these very high brackets never yield much). It is rather to put an end to such incomes and large estates, which lawmakers have for one reason or another come to regard as socially unacceptable and economically unproductive – or if not to end them, then at least to make it extremely costly to sustain them and strongly discourage their perpetuation. Yet there is no absolute prohibition or expropriation. The progressive tax is thus a relatively liberal method for reducing inequality, in the sense that free competition and private property are respected while private incentives are modified in potentially radical ways, but always according to rules thrashed out in democratic debate…according to our estimates, the optimal top tax rate in the developed countries is probably above 80 percent.

This resolves some of my confusion about how it was possible to have 70% – 80% tax rates on the rich – it was never expected to work in terms of revenue collection, it was just a gentler way of setting a maximum wage.

I’m confused because Piketty seems to treat this as very effective and a big part of the reason why inequality was lower during the period it existed, whereas other sources I have read say it was constantly loopholed around and basically had no effect on anyone. Given that there were a lot of very rich people in the US around that time, it seems like loopholes must have been a big part of the picture.

How can public debt be reduced to zero? One solution would be to privatize all public assets. According to the national accounts of the various European countries, the proceeds from selling all public buildings, schools, universities, hospitals, police stations, infrastructure, and so on would be roughly sufficient to pay off all outstanding public debt. Instead of holding public debt via their financial investments, the wealthiest European households would become the direct owners of schools, hospitals, police stations, and so on. Everyone else would then have to pay rent to use these assets and continue to produce the associated public services. This solution, which some very serious people actually advocate, should to my mind be dismissed out of hand. If the European social state is to fulfill its mission adequately and durably, especially in the areas of education, health, and security, it must continue to own the related public assets. It is nevertheless important to understand that as things now stand, governments must pay heavy interest (rather than rent) on their outstanding public debt, so the situation is not all that different from paying rent to use the same assets, since these interest payments weigh just as heavily on the public exchequer.

Piketty continues to have an unclassifiable position on debt, more nuanced than I have heard from anyone else. Here he seems to say that the government going into debt to create government services is similar in ways to privatizing those services, since either way rich people are getting paid for those services with everyone else’s money (though presumably debt is still much better, since taxation is much more progressive). He favors raising taxes so that services can be provided without creating any debt, and using large one-time taxes on wealth to clear existing public debt: “A flat tax of 15% on private wealth would yield nearly a year’s worth of national income and thus allow for immediate reimbursement of all public debt”. Sounds like an extreme moral hazard unless matched with something like a balanced budget amendment, though.

Interestingly, nineteenth-century novelists were not content simply to describe precisely the income and wealth hierarchies that existed in their time. They often give a very concrete and intimate account of how people lived and what different levels of income meant in terms of the realities of everyday life. Sometimes this went along with a certain justification of extreme inequality of wealth, in the sense that one can read between the lines an argument that without such inequality it would have been impossible for a very small elite to concern themselves with something other than subsistence:

extreme inequality is almost a condition of civilization. In particular, Jane Austen minutely describes daily life in the early nineteenth century: she tells us what it cost to eat, to buy furniture and clothing, and to travel about. And indeed, in the absence of modern technology, everything is very costly and takes time and above all staff. Servants are needed to gather and prepare food (which cannot easily be preserved). Clothing costs money: even the most minimal fancy dress might cost several months’ or even years’ income. Travel was also expensive. It required horses, carriages, servants to take care of them, feed for the animals, and so on. The reader is made to see that life would have been objectively quite difficult for a person with only 3–5 times the average income, because it would then have been necessary to spend most of one’s time attending to the needs of daily life. If you wanted books or musical instruments or jewelry or ball gowns, then there was no choice but to have an income 20–30 times the average of the day.

This reminds me of those headlines like “MANHATTAN SOCIALITE COMPLAINS THAT IT’S IMPOSSIBLE TO HAVE A DECENT STANDARD OF LIVING ON LESS THAN $1 MILLION A YEAR”, except much more sympathetic because they were plausibly right. It gives me profound gratitude for our past few hundred years of economic growth, and inspires some hope for the future.