Piketty's book is the most talked-about economics book of the year, arguing that capital is in the ascendance as labor has become diminishingly valuable since the 1970s, and that this can't stop, and won't stop.
He argues that the global economy -- and particularly the U.S. economy -- is headed back to the 19th century, when inherited wealth dominated the land and hard work was less important than one's parentage.
The whole AP interview is worth reading, but here's a bit of it:
Q: Your research shows that profits on investments — capital — increase faster than wages and economic growth. But a lot of people think greater inequality can help fuel stronger growth.
A: When inequality gets to an extreme, it is completely useless for growth. You had extreme inequality in the 19th century, and growth was not particularly large.
Because the growth rate of productivity was 1 to 1.5 percent per year (in 19th century Europe), and it was much less than the rate of return to wealth, which on average was 4 to 5 percent, the consequence was huge inequality of wealth. It's important to realize that innovation and growth in itself are not sufficient to moderate inequality of wealth.
Q: Are we automatically on a course that leads us back to the Gilded Age?
A: Nobody knows. The main message of the book is that there is no pilot in the plane. There is no natural process that guarantees that this is going to stop at an acceptable level.
Piketty's book earned the adoration of New York Times columnist Paul Krugman, who in a lengthy piece for the New York Review of Books praised the book's "sheer, exhilarating intellectual elegance" and said it "will change both the way we think about society and the way we do economics."
The work (which I have not yet read) puts the focus of economic discussion on capital (as the title implies), which Krugman says had been out of fashion in discussions of inequality. That's an important shift in the discourse:
The general presumption of most inequality researchers has been that earned income, usually salaries, is where all the action is, and that income from capital is neither important nor interesting. Piketty shows, however, that even today income from capital, not earnings, predominates at the top of the income distribution.
Piketty argues that the rate of return on capital is higher than the growth rate of the economy, and likely will continue to be for some time.
We have recent evidence of high returns on capital. The average annual return on the S&P 500 over the past 10 years has been 6.5 percent, despite the recession, compared to 3.7 percent for U.S. GDP in nominal terms.
Tyler Cowen, in a dueling review of "Capital" for Foreign Affairs, argued that Piketty's definitions of capital and its rate of return is too hazy, and his outlook for the success of investment in capital too optimistic. He acknowledges that the book is "important," accesseible and will "revolutionize how people view the history of income inequality," but he poo-poos the idea of a global tax on wealth.
Normally, economists think of the rate of return on capital as diminishing as investors accumulate more capital, since the most profitable investment opportunities are taken first. But in Piketty’s model, lucrative overseas investments and the growing financial sophistication of the superwealthy keep capital returns permanently high. The more prosaic reality is that most capital stays in its home country and also has a hard time beating randomly selected stocks. For those reasons, the future of capital income looks far less glamorous than Piketty argues.
Anyway, seems like a book we should all try to read.