CAPITAL IN THE TWENTY-FIRST CENTURY. By Thomas Piketty. Belknap/Harvard. 685 pages. $39.95.

It has been amusing to note the intensity of the critical back-and-forth between the political right and left in response to French economist Thomas Piketty and his game-changing book, "Capital in the Twenty-First Century." So let's begin by clarifying what Piketty is not.

Piketty is not a Marxist. He is a capitalist who wants to save capitalism from itself. In fact, he dismisses much of Marx's apocalyptic conclusions concerning capitalism's inevitable doom, either because of diminishing returns (that kill the engine of wealth accumulation) or because of ever-widening wealth divergence that would destabilize the socioeconomic order. For Marx, capitalism and social justice were incompatible, but Piketty draws no such stark conclusion, insisting only that unfettered capitalism does not lead to equilibrium, as Adam Smith and others have claimed.

Piketty is not a radical who advocates large-scale transfers of wealth or argues that inequality is fundamentally bad. On the contrary, he goes out of his way to explain that inequality, to certain degrees, is normal and good; it is the result of competition, talent, smarts and risk-taking. Without that, social and economic progress would grind to a halt.

Piketty is not a utopian who believes that excessive inequalities can be corrected globally and cooperatively, though he hopes to convince policy makers to embrace the concept of a progressive global tax on wealth.

So what is he? Piketty is an empiricist who relies heavily on data. He is an economist whose main aim is to present an abundance of facts in a cohesive and compelling way in order to influence public debate. He is a social scientist who refuses to treat economics in isolation, insisting that it is but one way to understand better the broad dynamics of civilization. He is a concerned citizen of the world who believes that gross inequality will destabilize democratic systems and lead to rebellion (history is on his side).

In many ways, Piketty's "Capital" tells us what we already know: that severe concentrations of wealth are undermining the social order. He tells us this by tracing the history of inequality over three centuries and across continents. He is brutally honest about the condition of his data: whether it's comprehensive, where it comes from, how the numbers were crunched. He offers caveat after caveat and encourages others to scrutinize the information behind him.

In other words, he is not an ideologue with pink-shaded glasses, bent on convincing readers to see things exactly as he sees them. So be skeptical of his critics.


The fundamental economic law he relies on is simple and indisputable: The return on invested capital (r) is now larger, and will almost certainly remain larger, than the growth rate (g). Currently, r is around 5 percent globally, on average; g is stabilizing at perhaps 1.5 percent. What's more, the larger the invested fortune, the larger the return, despite the "law of diminishing returns" that many economists hold dear. As proof, he cites university endowments. The largest endowments see a return of around 10 percent; the smaller endowments see returns of about 5 percent, or less. Money begets money.

Particularly disturbing is the concentration of wealth. Nevertheless, Piketty does not recommend across-the-board tax increases. His proposed solution, which is presented at the end of this long book, is a progressive global wealth tax, one that helps modernize the social state while preserving the benefits of competitive capitalism.

Piketty points out that societies, especially in Europe and the U.S., assumed the post-war economic boom was a new normal. He shows how World War I, the Great Depression, World War II had cataclysmic impacts on global wealth, but that large personal fortunes started to bounce back by the 1980s, the first decade of deregulation and the beginning of political efforts to dismantle the social state in favor of free-market solutions.

But an underregulated free market inevitably leads to destabilizing inequalities, Piketty shows. What's more, inherited wealth, which once dominated, is a significant force that's likely to ramp back up during the 21st century, compounding fortunes and further concentrating capital in the hands of the very few.

For a while, there was a reduction in inequality of wealth after these 20th-century shocks, and a higher-than-normal growth rate, including wage increases that exceeded the rate of inflation and enabled the emergence of a robust class of people who managed to secure a sliver of the pie.

Consequently, working people could afford to purchase homes and cars and educations. Since the 1980s, and especially in the wake of the Great Recession of 2008, that world order increasingly has seemed peculiar, perhaps the exception to the rule.

Today, wages are not keeping up with inflation, household debt is higher than ever, the threat of unemployment looms larger and retirement plans for most Americans are woefully insufficient. Health care, even with the recent reform, remains extremely expensive, as does education. Pensions, health care and education are treated as rights by most other rich countries, but not by the U.S., and they're breaking the banks of far too many.

If no interventions are attempted, wealth inequality will cause the middle class to deteriorate further, leaving only an underclass and working class (and a small professional sector) dominated by a tiny oligarchy of the superrich.

Toward crisis

The popularity of "Capital" can be attributed to three things: its comprehensive and methodical presentation of an important subject; Piketty's clear, careful prose; and timing. The book appears exactly as the social zeitgeist, especially in the U.S., is deeply colored by broad concerns over capitalism's excesses.

We all know something's out of whack. Inequality is beginning to tear at the social fabric of the country. It is exacerbated by lower growth, huge CEO salaries, the return of inherited wealth, regressive tax policies and tax evasion, disproportionate investment returns that favor large fortunes and educational failures that threaten U.S. competitiveness.

At a certain point, when the suffering is intense enough and widespread enough, rebellion is likely. Should we wait for that moment?

Piketty clearly has struck a chord. His critics on the left insist he is too tame in his analysis; they want more theory, especially Marxist theory, and less pragmatism. His nitpicking critics on the right are trying to discredit him, accusing Piketty of faulty analysis and charging him with intellectual crimes he did not commit.

The very large question implied by "Capital" is about the role of government and the degree to which we want it to intervene in creating a fair social state for the 21st century and beyond. It is helpful to remember what Piketty makes very clear, that the terrific shocks of the 20th century (world wars, economic depression) largely provoked rich countries to embrace, sometimes fiercely, sometimes haltingly, a new status quo: the social state.

The wars coincided with a broad shift away from a form of capitalism that largely depended on inherited wealth and a "rentier" society toward a more industrial form in which rental income was largely replaced with income from returns on investments. This new form of financial capitalism allowed for the creation of instruments and institutions (progressive taxation, retirement funds, mortgage and other lending and higher government spending on services) that helped us construct a new social order.

Governments no longer were limited by very low tax revenues, which in the 19th century had been below 10 percent of national income (today, in the U.S., they are around 30 percent of national income). Now they could fund health care, public education, pension plans (like social security) and other social services.

We got used to it, especially during the economic boom that followed World War II. By the 1980s, the political winds were shifting. Deregulation, privatization and tax competition that reduced national revenues began to eat away at social institutions.

Now, Piketty is asking us to contemplate the sort of society we want for ourselves and our children. Do we want a form of "free market" capitalism that erases the gains of the middle class and continues to enrich a tiny oligarchy, or do we want a more regulated form of capitalism that strives to correct gross inequality? At stake, Piketty says, is democracy itself.

Reviewer Adam Parker is book page editor for The Post and Courier.