What Piketty Forgot


Thomas Piketty’s “Capital” is an extremely important contribution to the study of economics and inequality over the last few centuries. But because it fails to address the real limits on growth—namely our ecological crisis—it can’t be a roadmap for the next. (Photo: Dai Luo / Flickr)

By now, it’s no secret that French economist Thomas Piketty is one of the world’s leading experts on inequality. His exhaustive, improbably popular opus of economic history—the 700-page Capital in the Twenty-First Century—sat atop the New York Times bestseller list for weeks. Some have called it the most important study of inequality in over 50 years.

Piketty is hardly the first scholar to tackle the linkage of capitalism with inequality. What sets him apart is his relentlessly empirical approach to the subject and his access to never before used data—tax and estate records—that elegantly demonstrates the growing trends of income and wealth inequality. The database he has compiled spans 300 years in 20 different countries.

Exactingly empirical and deeply multidisciplinary, Capital is an extremely important contribution to the study of economics and inequality over the last few centuries. But because it fails to address the real limits on growth—namely our ecological crisis—it can’t be a roadmap for the next.

Inequality and Growth

One of the main culprits of inequality, according to Piketty (and Marx before him), is that investing large amounts of capital is more lucrative than investing large amounts of labor. Returns on capital can be thought of as the payments that go to a small fraction of the population—the investor class—simply for having capital.

In essence, the investor class makes money from money, without contributing to the “real economy.” Piketty demonstrates that after adjusting for inflation, the average global rate of return on capital has been steady, at about 5 percent for the last 300 years (with a few exceptions, such as the World War II years).

The rate of economic growth, on the other hand, has shown a different trend. Before the Industrial Revolution, and for most of our human history, economic growth was about 0.1 percent per year. But during and after the rapid industrialization of the global north, growth increased to a then-staggering 1.5 percent in Western Europe and the United States. By the 1950s and 1970s, growth rates began to accelerate in the rest of the world. While the United States hovered just below 2 percent, Africa’s growth rates caught up with America’s, while rates in Europe and Asia reached upwards of 4 percent.

But as Marx observed in the 19th century, economic growth did little to reduce inequality. In fact, as Piketty demonstrates, wealth has grown ever more concentrated in the hands of the few, even as the pie has gotten bigger. Piketty developed a simple formula to illustrate how wealth gets concentrated: when the average rate of return on capital (r) is greater than the rate of economic growth (g)—in mathematical terms, when r > g.

Through the 19th and early 20th centuries, according to Piketty, the rate of return on capital exceeded that of growth, and inequality blossomed in the industrialized world. But in the 1950s, this trend began to shift—not because of redistributive economic policies, but rather as a consequence of historical calamities in the preceding decades. During this time, aggressive social, economic, and tax policies were ushered in by devastation and destruction.

With these policies set in place, the recovery efforts after the Second World War accelerated growth, which for the first time in recent history exceeded the rate of return on capital—that is, g > r—creating a middle-class.

A Mistaken Model

This was the period when economists and policymakers developed a fetish for economic growth, thanks in part to Simon Kuznets, an influential Belarusian-American economist.

Looking at data spanning from 1913 to 1948, Kuznets concluded—mistakenly, according to Piketty—that in the aggregate, economic growth automatically reduces income inequality. Kuznets argued that a rising tide of industrialization would at first create greater inequality as populations were left behind, but once they began to adapt to the new economic conditions, they would eventually gain access to more wealth as they became fully integrated in the new economic model—in essence closing the wealth gap.

It turns out, though, that the rich just keep getting richer.

This misinterpretation helped justify a quest for perpetual economic growth and free markets, paving the way for massive industrialization, accelerated climate change, and widespread environmental destruction, while simultaneously neglecting the very issue Kuznets set out to address: reducing income inequality.

In Capital, Piketty rigorously applies Kuznets’ analysis to a larger dataset and debunks the argument for perpetual growth. Instead, Piketty concludes that industrialization without any enforceable progressive taxation has actually created greater inequality.

Piketty thus forces liberal and conservative economists alike to rethink their models of growth. But if growth isn’t the answer, what is?

The Limits of Growth

Piketty prescribes a few remedies. But he does not take into serious consideration the limits to growth. He is a traditional Keynesian in this regard, which may be his biggest flaw.

His main prescription—a “progressive tax on global capital”—assumes that a 2-5-percent global growth rate is sustainable in the long run and, with a redistribution of capital, will reduce inequality. However, he concedes that a progressive tax on global capital is utopian. So instead, he’ll settle for a “regional or continental tax” as the first step towards a progressive tax on global capital—starting in the European Union.

Piketty’s solutions focus more on taxing egregious levels of wealth concentration than on the systemic conditions that incentivize the desire to accumulate egregious amounts of capital in the first place. He seems to believe that pushing tax rates high enough will deter CEOs from pursuing millionaire salaries, and that this can be done without hindering growth. The first is unlikely, and the second misses the real problem with growth.

Piketty spends about four pages of his 700-page tome talking around the limits to growth, but he fails to adequately address the fact that limitless growth—i.e., consumption—is completely unsustainable on a finite planet. Recent reports from NASA, the Intergovernmental Panel on Climate Change, and the U.S. government’s National Climate Assessment conclude that the planet cannot continue on the same path of economic growth if it is to sustain human life.

What this means is that it doesn’t matter if we implement a progressive tax on capital because our planet will not sustain forever a growth rate of even 1 percent annually. A dead planet will support neither high earners nor tax collectors.

Towards a New Economy

All this leads to a larger conundrum.

On the one hand, we have extreme inequality, where many live on less than $2 a day while others have so much wealth that it would require several lifetimes to spend. On the other hand, we have a climate crisis that has imposed limits to growth, so we can’t grow our way into shared prosperity.

The traditional approach to inequality is to bring down those at the top while raising up those at the bottom. But to what level should we bring people, considering our finite planet?

Do we want everyone to live a mythical American middle-class lifestyle? Where every family of four lives in a two-car-garage home with a TV in every room, and every family member has a smart phone, tablet, and computer? Where they take a vacation to the other side of the globe once a year, and send their children away to a university and buy them a car when they are of age?

Is this the standard of living we want for every person on the planet? Obviously it can’t be—it would require at least five Earths.

Piketty is right that our political economy favors the growth of inequality, and that inequality in turn poisons our politics. But while we should aspire to create a society that shares its prosperity, we need to address a much bigger gap than the one between rich and poor. We need to address the gap between what’s demanded by our planet and what’s demanded by our economy.

At the center of the rapidly growing New Economy Movement are ecological balance, shared prosperity, and real democracy. If we can’t find a way to build all three, then the only economy worth measuring is the number of days we have left.

Thankfully, the New Economy Movement is seriously considering the four-fold systemic crisis—ecological, economic, social, and political—to identify a just transition to the next system. Piketty can show us part of the problem, but he can’t show us how to solve it on his own.

Noel Ortega is the coordinator of the New Economy Working Group at the Institute for Policy Studies.

  • Uday Gade

    Many sentences in this topic are incomplete. Please have a proof-reading.

  • John Isbister

    Response to Noel Ortega, “What Piketty Forgot,” June 18, 2014

    Noel Ortega’s critique of Thomas Piketty’s Capital in the Twenty-First Century is
    thoughtful but not devastating. He seems to wish that Piketty had written a
    different book, on how ecological constraints will prevent economic growth in
    the future. As it happens, Piketty did not write that book; his book is about how
    capitalist growth will lead to further disparities in wealth.

    If anything, Ortega’s perspective adds to Piketty’s
    argument and makes it even more persuasive. Here is why.

    Piketty claims that inequality in wealth increases if the rate of return on capital exceeds the rate of economic growth. The claim is supported by extensive time-series data and by a few simple theoretical propositions. Essentially, Piketty argues, economic growth leads to at least
    the possibility that the new wealth it creates will end up in the hands of
    people who had little wealth before, and therefore increase the dispersion of
    wealth. The return on existing wealth, in contrast, necessarily accrues to
    those who already have wealth, and therefore increases the gap between the
    haves and the have-nots. When r (return on capital) exceeds g (growth of the
    economy), wealth holding necessarily becomes more unequal.

    In the real world, which is greater, r or g? Piketty
    demonstrates that in the few decades following the Second World War, g
    (economic growth) was unusually high, probably exceeding the return on capital,
    r—and consequently the gap between the rich and the poor fell. He argues,
    however, that this was an anomalous period, because the world economy was
    catching up from the huge destruction of two world wars and the Great
    Depression. Economists—following the lead of Simon Kuznets—thought those
    decades represented the normal trajectory of capitalism, and that we could
    therefore look forward to growing equality.

    In fact, however, those decades were abnormal. We
    are now experiencing the new normal, and can look forward to more of the same,
    namely greatly reduced rates of economic growth. In normal periods, r exceeds
    g, and inequality intensifies.

    Why will economic growth be low? Piketty emphasizes
    two reasons, and now Ortega has added a third. Piketty’s first reason is
    historical: except when it has been in catch-up mode, economic growth has
    seldom exceeded 1.5% a year. His second reason is demographic: population
    growth is one of the drivers of economic growth, but world population growth is
    slowing significantly, and in some areas turning negative.

    Now Ortega adds a third reason for expecting slow
    economic growth (maybe eventually zero growth), namely the ecological
    constraints to growth.

    In other words, there is nothing in Ortega’s
    perspective to contradict Piketty’s analysis: he simply adds another reason for
    thinking that Piketty is probably right. The slower economic growth (and zero
    growth is certainly slow), the more likely that the return on capital will
    exceed growth, and inequality will worsen.

    This leads (in my mind, at least) to an interesting
    question about the future of capitalism. Piketty makes it abundantly clear that
    he is not a Marxist, that he is not even interested in Marxist questions.
    Still, I wonder.

    One interpretation of Marx’ voluminous writings is
    that he predicted the collapse of advanced capitalism because of a “realization
    crisis.” The working class would be so impoverished that it could not buy the
    output of capitalist production; consequently capital could not be reproduced
    and the system would collapse. In the Great Depression, many people thought
    they were living through exactly what Marx had predicted. Following the 1930s,
    however, it turned out that a combination of war and Keynesian economic policy
    rescued the system.

    Now we have Piketty predicting that the gap between
    the rich and the poor will rise indefinitely.

    Fast economic growth could ameliorate this trend,
    but we are not going to get fast economic growth because of (1) historical
    trends, (2) demographic slow-down and (3) ecological constraints to growth. Can
    the capitalist system survive a gap between the 1% and the 99% that grows
    without limit? One doesn’t have to be a Marxist to have some doubts.

    In any case, Ortega’s piece in no way contradicts
    Piketty’s argument, and in some ways reinforces it.

    John Isbister
    Professor of Economics
    Ryerson University
    Toronto, Canada
    June 20, 2014

  • robertwgordonesq

    Outcomes (income) can’t possibly be “equal” [which
    is what the term ‘income inequality’ subtly implies] when the inputs
    (ingenuity, effort, skill, and yes…capital [money or material for investing])
    are disparate.

    You will never be “rich” if you can’t do that very basic mathematical

    Further, I can’t understand why “poor” people need compare themselves to
    “rich” people and why “liberal-socialist-communists” keep trying to
    find and justify new envious ways to punish the “rich” for their
    industriousness with taxation and other confiscation schemes and whip the
    “poor” into an accusatory, “poor me” frenzy instead of
    advocating and providing ways in which “the poor” can help

    Teach us to fish…don’t just give us fish. The latter is just plain sinful
    and irresponsible.

    Life has dealt us each a different set of cards. Some of us received great
    hands, and others not so great. It isn’t necessarily the hand we’ve been dealt
    which matters, but rather what we decide to make of that hand, that counts.

    • certop

      thank you for commenting, robert. a few points in response, in no particular order.

      1. yes, you are correct that outputs will never be equal if the inputs are different. but alongside the “ingenuity” and “skill” you credit the wealthy with surely possessing, i would add the point from your final paragraph: the hand you are dealt. that makes a huge difference in access to capital, the skills you’re able to cultivate and nourish, and the resources at your disposal. anne richards famously said of george w. bush that he was born on third base and thought he’d hit a triple.

      2. your comment ignores the role of public policy. those “wealth creators” of yours aren’t just out making money. many of them (though of course not all) use their wealth to lobby the government against basic protections for workers or the environment that go against their bottom line. because of their wealth, they’re much more successful than their opponents relative to their numbers. whatever your views on taxes or regulatory issues, the fact that inequality changes our politics and government as well as our economy makes it a public concern.

      3. “liberal-socialist-communists” are not a thing.

      4. the bigger point of this article isn’t actually about economic inequality, it’s about ecology. all of us, rich and poor, are going to have to change the ways we create value, measure success, make money, and live our lives if we want our planet to be habitable for future generations.

      • robertwgordonesq


        Thanks for your response.

        Yes, many are dealt great hands and I certainly agree with you that those
        resources make a HUGE difference in the ability of “the rich” to be
        “rich” and stay “rich”. However, the typical policy I
        seem to hear from what I will define as “liberals” channels envy,
        resentment, and bitterness disguised as altruism more so than it advocates
        personal responsibility. For example, I would have much preferred Piketty
        have written a book entitled “Here is how the rich got rich and here is how
        you can do the same.” If he and others are so concerned about the concentrations
        of wealth, why not a) teach other people how to do the same or b) expose fraud
        and corruption on the part of the “rich” (i.e., show that their gains are
        somehow illegitimate or fraudulent. I do not see anything wrong with people
        seeking wealth as long as they do so legitimately without force, fraud, or
        farce. Forcibly taking from the “rich” through
        threats or taxation is “Robin Hood” economics. No mater what Robin Hood’s motives, he was
        still a thief.

        2. True, my comment ignores the role of public policy, however just because my
        comment ignores it, doesn’t mean I ignore it. I am very much aware of how money influences
        politics. Look, there are certainly “wealthy” people out there who are sons of
        bitches. And by that I mean, they are rigging the game in their favor. No
        question about that. However, in terms of bribing Congress and other political
        leader, that is not the fault of the “”wealthy”…that is the fault of the *elected
        representatives*. It does not matter how much money the Koch brothers
        have, nor how much the Supreme Court and Citizens United allows them to
        spend. In the end, they only have two votes in any given election. Under
        a democracy, representatives subjected to “bribery” can and should be
        voted out. Hence the need for collective self-responsibility. Because even if
        one accepts Piketty’s taxation scheme, it can’t work unless the elected
        officials make such taxation work but if the politicians are susceptible to such
        political “bribery” then that is not the fault of the “wealthy”, it’s
        the fault of the electorate who don’t vote those SOB’s out of office.

        3. Yes, “liberal-socialist-communists” is a thing…I just made it up
        and I expect royalty payments every time it’s used.

        4. I’d agree with you that the larger point of the article was (or should have
        been) about ecology and living together in a sustainable way. I’m also with you
        100% on changing our definitions of value, success, and how we live our lives.
        However, 1) I don’t think the article makes out a persuasive case for those in
        a position to do something about it to make such changes as the article does
        not convince “rich” people why they should think and act differently
        (since the “wealthy” can largely insulate themselves for the consequences of
        their life style and policy choices…at least they think they can) and 2) the
        article does not convince or rally the rank and file 99%ers as to a real
        plan of action.

        fact, the article accepts and reinforces the “wealth theory of value and
        success” because it assumes that “wealth inequality” is a bad thing
        and only if “the poor” had more income (or the “rich” had less), everything
        would be right with the world. You are
        still stuck evaluating your sense of value based on what your neighbor owns or
        does not own. You are still of the mind set that it take “money” to make a
        change. If that is so, to that extent, the article has failed even before it
        began. Again, I’d wager that “wealthy” people don’t give a darn about the
        ecology because they probably believe they can insulate themselves from these alleged
        disasters and probably think it’s probably a good thing since all the
        complaining riffraff will be killed off by natural disasters while they are
        safe in their bunkers.

        just saying, if you (the author, Noel Ortega) really wants a
        revolution, you need to be revolutionary and this article simply does not give
        it. There is no incentive for the “wealthy” to change, and there is no
        revolutionary rallying point for the “non-wealthy” to rally around. The “wealthy”
        know full well that “growth” is not sustainable, therefore the more savvy among
        them foment wars and conflict (to artificially reduce growth) and create and
        burst economic bubbles.

        all in favor of joining a revolution, but you’ve got to give e something revolutionary

  • CASSE3

    A steady state economy would help “close the gap.” As a positive alternative to economic growth, a steady state economy recognizes that the economy is a sub-system of the environment. It would have stable population and consumption, and throughput that is kept within ecological limits.