Thomas Piketty is a French economist who has done something rare: publish a dense tome on economics that has rocketed to the top of bestseller lists around the world. Capital in the Twenty-First Century is a 700-page book whose central argument is that capitalism is flawed because the rate of economic growth (most people's incomes) normally rises much more slowly the rate of return on capital, most of which is held by the wealthy. The result is rising income inequality. I spoke to Mr. Piketty by phone in Paris.

To solve the problem of rising inequality, you propose small worldwide taxes on capital transfers and on wealth, and prohibitive taxes on extreme incomes and inheritance. But such taxes are not popular today, and there is little sign they will catch on. Does this make you pessimistic?

I believe in the power of ideas, I believe in the power of books, but you have to give them time. Books have a very long-term impact, and it's never a deterministic impact – you can never say "this book has had this particular impact on policy." It's much more complex.

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The kind of policy conclusions I derive in the book are already in the public debate. For instance, we have this talk about tax havens. Five years ago, people were saying that nothing would ever happen; Swiss banks would keep their accounts secret and would never accept having automatic transmission of information. And then suddenly there were U.S. sanctions against Swiss banks and things began to change. I think these general moves will continue.

It's not an all-or-nothing approach. We don't need a fully global wealth tax to make progress. I think a lot of progress can be made at the U.S. level, at the European level, through intergovernmental cooperation. Even in China, everyone is talking about wealth inequality… People right now are talking a lot about introducing property taxation in China.

During the past decade, both China and Brazil saw decreases in inequality at the same time as very strong economic growth. Does this contradict your hypothesis?

The main force pushing toward reduction in inequality has always been the diffusion of knowledge and the diffusion of education. That's a basic force that also allows for convergence within a country. This requires quite inclusive educational institutions. I think Brazil has been making progress in this. And certainly one of the reasons for the success of China, if you compare it to India, for example, is that China has much more inclusive educational institutions than India – a much bigger fraction of the population has access to school and skills.

Now, are we really sure that inequality in income and wealth has been going down in Brazil and China in recent years? There is a lot we don't know. The data we have for these two countries is far from perfect. Inequality may have reduced if you compare the upper-middle and the bottom, or the upper-middle and the lower-middle, but if you compare the top and the middle, I'm not so sure inequality has reduced in China – the top wealth holders have been rising faster than the average.

During the past 30 years the world has seen the greatest decline in absolute poverty in human history, the proportion in poverty going from nearly 40 per cent down to 25 per cent of the world population. Should it matter that a few people got really rich?

You do need some level of inequality to get the right incentives and generate growth. But if people feel that a disproportionate share of growth only goes to the top-wealth minority, then a large fraction of public opinion in European countries or in North America might turn against globalization. So I think it's important to ensure that inequality remains within limits that can be understood and accepted, and indeed are in the common interest.

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So inequality, up to a certain point, is in the common interest, but when it gets too extreme, it's just in the interest of the people at the top but not in the common interest any more. When you look at the United States over the past 30 years, you have between two-thirds and three-quarters of the aggregate growth and primary income going to the top 10 per cent and mostly to the top 1 per cent. If the growth rate during that period had been very good – 4 or 5 per cent per year — then rising inequality would not have been a problem because there would be a lot left for everybody. But the problem is that the growth performance has not been particularly good. Per capita GDP has risen by only perhaps 1.5 per cent per year. So if you have two-thirds or three-quarters of that going to the top, there is really very little left for the middle class and the bottom group.

Some of your critics in the United States say you have an overly simple definition of the rate of return on capital and believe it would look different if you separated simple rentier investments – such as sitting on real estate or bonds – from risk-taking uses of capital that create growth in the economy. Are you failing to take into account the use of risk?

I certainly agree that capital is not a one-dimensional object, and that the return on capital takes very different forms for different assets or different people. I emphasize the fact that financial deregulation has probably increased the inequality in rates of return, so the very large portfolios have access to financial products and rates of return which the middle class doesn't have access to. And real-estate bubbles and housing prices of course have played a very large role on their own in the evolution of rate of return.

The point is that even if there were only one form of asset, even if you had perfect capital markets with perfect financial information, where everybody would have access to the best return in diversified portfolio – even if these perfect conditions were met, which of course will never be the case – you would still have this problem of rising concentration of wealth. Perfect competition per se, perfectly functioning markets per se, are actually not a solution to this problem. In recent years, we've been asking too much of creative monetary policy, so you have very low rates of return on some assets, like public debt and short-term financial assets, and at the same time you have bubbles on other assets, like real estate. Some people are making huge profit in-between these rates of return. This huge volatility across different rates of return shows that we've been asking too much of creative monetary policy and too little of fiscal policy.

What do you say to anti-capitalists who read your book and say, "Well, if capitalism inevitably causes rising inequality, why not abandon capitalism and have some other kind of economy?"

Oh, that would be a very bad solution. Private property and the market system are good not only to promote innovation and to promote growth; private property and the market system are good for our personal freedom. Private property goes together with the possibility to move to a different place. Every command economy in the world in history not only was a disaster in terms of economic growth, but was also a disaster for personal freedom – because if you do away with private property, usually you end up with an internal passport system where you decide where people should live and where they should not live.

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Nobody should ever think of that. I belong to the post-Marxist generation, if you wish – I turned 18 in 1989, with the fall of the Berlin Wall; I travelled to Eastern Europe to see those countries after the fall of their communist dictatorships, and I've never had any temptation for that. Anti-capitalists should read the history books.

I want to keep private property and the market system. But I want to make private property and the market system the slave of democracy, rather than democracy the slave of private property and extreme inequality.