Blog Post - Views on the Economy and the World

Piketty’s Fence

| Oct. 07, 2014
Most of the reviews of Thomas Piketty’s book Capital in the Twenty-First Century have already been written.  But I thought it might be best to read it all the way through before offering my own thoughts on this book, which startlingly rose to the top of the best seller lists last April.  It has taken me five months, but I finished it.

One of the things the book has in common with the Karl Marx’s Das Capital (1867) is that it serves as a rallying point for the many people who are passionately concerned about inequality, regardless whether they understand or agree with the specific arguments contained in the book in question.  To be fair, much of what Marx wrote was bizarre and very little was based on careful economic statistics.  Much of what Piketty says is based on careful economic statistics, and very little of it is bizarre.

A problem with having a debate about “inequality” is that there are many different measures of the distribution of economic resources and criteria for evaluating it.   Yes, we should not be content with summarizing all of economic performance into the single criterion of aggregate GDP.   But neither is it possible to summarize all other important dimensions of the distribution in a single second statistic to measure inequality.  Trends in within-country inequality can look very different from trends in cross-country inequality, for example.  And so forth.

Within the United States, income inequality by most measures has been rising since 1981, and by 2007 had approximately re-attained the peak of the early 20th century [Fig.1.1, p.24].  On this much we should be able to agree. The same is true within other major English-speaking countries (the UK, Canada and Australia).  In these countries, income inequality had declined sharply during the years 1914-1945, as it did also as in France, Germany, Japan and Sweden.  But in the latter group income remains far more equally distributed than it was at the peak of inequality a hundred years ago.

Economists, at least in the United States, have focused on one or the other of several kinds of inequality:

  • First is the difference in wages or incomes between “skilled” and “unskilled” workers, defined according to whether they are college-educated.  Here the higher wages of the better off group are often agreed to reflect the economic value of their skills in an increasingly technological economy, and the question is how to improve the skills of those on the other side of the fence.  (This has little to do with the gap between the upper 1% and the rest.)

  • Second is the very high compensation of corporate executives, and others in the financial sector.   The financial crisis of 2008 left many observers understandably doubtful of claims that this compensation is a return to socially valuable activities.

  • Third is the “winner take all” aspects of many professions, from dentists to university professors to sports and pop stars.   In a society that identifies, thanks to modern technology and culture, who is the best dentist in town or the best football player in the world, relatively small differences in abilities win far bigger differences in income than they used to.

  • Fourth is “assortative mating,” according to which highly accomplished professional men no longer marry their secretaries but instead marry highly accomplished professional women.

Piketty’s main concern is none of the above.   He discounts the skills gap explanation.  [“This theory is in some respects limited and naïve.” (p.30­5)]    He doesn’t say much about the “winner take all” or “assortative mating” phenomena.  He does have definite concerns about excessive executive compensation in areas like finance, but they are not the primary concern of this book.

The central concern of the book is none of these varieties of income inequality, all of which have to do with “earned income” (wages and salaries).  It is, rather, what he sees as a 21stcentury trend toward inequality of wealth, to be brought about by steady accumulation of savings among the better off, passed down along with accrued interest to the next generations in their inheritances.

This is a prediction about what will happen in the future more than an observation about a recent trend [figures 10.3-10.5; pages 344-349].   The increases in various measures of inequality since the 1970s have had more to do with earned income than with wealth.

It is true that the capital share of income (interest, dividends and capital gains) rose gradually in major rich countries during the period 1975-2007, and the labor share (wages and salaries) fell [Fig.6.5, p.222].   This trend would support Piketty’s hypothesis if it continued.  He deserves credit for pointing out the lack of foundations behind assertions that capital’s share will necessarily revert to a long-run constant, which used to be declared as approximately 0.25.

His vision is focused squarely on the truly long run, however: century-long trends, not decade-long fluctuations.  For example the Global Financial Crisis is a blip for him.   Incidentally, it is a blip that runs counter to his ultra-long-run hypothesis:  His statistics clearly show a discrete fallin inequality and in capital’s share in 2008-09, because asset prices plummeted.

Three century-long movements constitute the essence of the book:  a rise in inequality in the 19th century, a fall in inequality in the 20th century, and a predicted return to high inequality in the 21st century.

  • Piketty argues convincingly — not just with statistics but also with frequent citations of the novels of Honoré de Balzac and Jane Austen (as remarked by most reviewers) – that the first increase in inequality in France and Britain, mostly from 1800 to 1860, took the form of capital accumulation.   A fence divided the rich rentiers, who lived off their interest, from everybody else, who had to work for a living.

  • The most dramatic movement in Piketty’s graphs is the second one, the fall in inequality concentrated in the period from 1914 to 1950 [figures 8.1, 8.5, 9.2, 9.3 and 9.5, on pages 272, 291, 316, 317, and 317, respectively].  It is attributable to the destruction of capital in two world wars, inflation, the 1929 stock market crash, and a historic social movement in the 1930s and 1940s toward big government and progressive taxation.

  • What is surprisingly scarce in his numbers is evidence that the third movement, the renewed upswing in inequality, which he thinks may have already started since 1980 in the English-speaking countries, is due to a shift from labor back to capital.  The share of capital income in the UK and France remains far lower than it was in 1860. The increases in various measures of inequality since the 1970s have had more to do with shifts withinlabor’s share (between different categories of earned income) than with wealth. Today’s rich work, unlike those characters in Balzac and Austen and Balzac.

Thus the hypothesis is much less of an explanation for the past (whether the past 6 years, 35 years, or 150 years), than it is a prediction about the future:  a prediction that capital will accumulate and the rich will get richer through inheritance and capital income (”unearned income”) rather than through outlandish salaries and stock options (“earned income”).  For all the impressive collection of historical data, the prediction is based mainly on a priori reasoning:  income distribution must tend to inequality because savings accumulate.

But one could just easily find other a priori grounds for reasoning that countervailing forces might kick in if things get bad enough.  Democracy is one such force.  Progressive taxation arose in the 20th century, following the excesses of the Belle Époque.  A political trend of that sort could recur in this century if the gap between rich and poor continues to grow.

A few years ago, American voters and politicians were persuaded to reduce federal taxes on capital income and estates.  They phased out the estate tax completely (effective in 2010), even though this would benefit only the upper 1 per cent.   This is standardly viewed as an example of the rich manipulating the political economy for their own benefit.  Indeed, we know that campaign contributions buy some very effective advertising.  But imagine that in the future we lived in a Piketty world, a return to the golden age of Austen and Balzac, where inheritance and unearned income were the sources of stratospheric income inequality.  Would a majority of the 99 % still be persuaded to vote against their self-interest ?


Frank, Robert H., and Philip J. Cook. 2010. The Winner-take-all Society: Why the Few at the Top Get So Much More Than the Rest of Us. (Random House).

Goldin, Claudia, and Lawrence Katz. 2009. The Race Between Education and Technology (Harvard University Press).

Greenwood, Jeremy, Nezih Guner, Georgi Kocharkov, and Cezar Santos. 2014. “Marry Your Like: Assortative Mating and Income Inequality.” American Economic Review, 104(5): 348-53.

Piketty, Thomas. 2014. Capital in the Twenty-First Century (Belknap Press).

[A shorter version appeared at Project Syndicate.]

For more information on this publication: Please contact the Belfer Communications Office
For Academic Citation: Frankel, Jeffrey.Piketty’s Fence.” Views on the Economy and the World, October 7, 2014,