The Piketty review to end all Piketty reviews (now in English)

Because of popular demand (n > 3), here is my review in English.

Introduction: Is this review worth your while?
Normally I review books few people would read, at most a small specialist audience. In such cases, I only run the risk that I want to encourage the reader to read the book despite all the criticisms I have. Why else are we writing reviews?

With Capital in the 21st Century the case is different. The book is an incredible bestseller. Its reviews combined would make for several books. As a reviewer, I therefore have to criticize not only the book but also its criticisms. Moreover, everything has been said already. My only hope is that, firstly, not all those who claim to have read the book, really have read it, and, secondly, that there is some interest among political scientists, who don’t read the book because it may be intimidating in size and scope.

In fact, the length (almost 600 pages) and partial dryness of the work raises doubts as to whether the book is not the economic equivalent of The Canterbury Tales or Ulysses: every middle-class household needs to own them, but few would bother reading them. As a matter of fact, The Wall Street Journal (Ellenberg 2014) reported that most readers give up after about 26 pages. Well, I persevered, whether always with due diligence remains to be seen. Clearly, this is not a book for your beach holiday (Milanovic 2013).

Nevertheless, you can and should read the book, even if you are not an economist. It is an enormous and impressive work. It teems with interesting original statistics that allow for large excursions over hundreds of years and across continents. The litanies of the empirical and theoretical economic research are garnished with anecdotal evidence from history and literature, from A (Jane) Austen to Z (Emile) Zola. Piketty’s book is written so clearly that it is, in parts, suitable as a textbook for undergraduate students. I also recommend reading the book to the professional audience, none the least because it eschews econometrics or other techniques, which often serve more to obfuscate than to illuminate. Finally, Piketty is not afraid of provocation. As a political economist I am always grateful for the precisely set punches which Piketty stabs against his own discipline. This may partly explain why he did not have to wait long for a riposte from fellow economists.

But first things first: I start the review with a (too?) short summary. Then I turn to the reception of the book, primarily the critical voices. The last part gives a bit of criticism of the criticisms and also adds a few observations on what political scientists can learn from the work. I think that both the book and its criticisms show profound problems in the positive and normative theory of economics; problems which may seem obvious for other social scientists, but which are very instructive nonetheless.

So what is all the fuzz about?
The book is divided into four major sections: The introductory chapters contain a short version of the main theses (for quick readers) as well as some basic definitions which facilitate access for people other than economists. The second section discusses the functional division of national income between capital (owners) and employees. It deals with the development of the relationship between capital assets and national income, which for Piketty is a key indicator of the underlying driving forces of economic inequality. The third section discusses the evolution of inequality between people. Piketty focuses primarily on three countries (France, England and the USA), but always makes references to other industrialized countries that are in his database. The fourth section first discusses current developments – especially the global financial crisis. Second, Piketty elaborates why he is in favor of introducing a global tax on capital (and assets).

Piketty (and colleagues)’s greatest achievement is a systematic inventory of economic inequality over two hundred years in more than a dozen OECD countries. For years they have collected data from archives of public tax statistics. These data are well documented in the World Top Incomes Database ( and freely accessible. The data base is constantly expanding and already contains some non-OECD countries.

Although there is a lot of information, the most important piece for layman is the long-term evolution of income inequality in the last hundred years. In many of the countries, the curve follows a u-shape. In the last 100 years the inequality first fell after the two world wars until the end of the 1970s. In recent decades it has increased again significantly and in Anglo-Saxon countries it is (almost) back up to the level of 1914.

Piketty himself admits that the data are far from being perfect. However, he argues that, if anything, they underestimate the true extent of inequality, because official tax statistics do not allow for conclusions about non-reported income. Indeed, the recent literature (Zucman 2013) finds that nearly 10 percent of the gross national product of rich industrial countries is stored in tax havens.

What are the driving forces of this development and how are they to be assessed? Piketty summarizes his argument in a notorious formula, which has even been topic in US American late night talk shows: r > g. r stands for return on investment, such as interest on deposits. g is the growth rate of the economy as a whole. According to Piketty inequality rises, if r > g, and in Piketty’s eyes this case is the most frequent one. If financial investments generate higher returns than economic growth, capital owners will have higher income than workers, which transforms into the concentration of national wealth in the long term. As a consequence, an increasing share of national wealth is inherited, creating a feedback process: rising inequality always generates greater degrees of inequality.

Piketty interprets this feedback process similar to Marx as a basic contradiction of a fully functioning capitalism. You could also say there is an innate tension: except for times of great economic growth, capital ownership dominates other forms of income generation. The consequence is a rentier society in which personal performance and work creates insufficient opportunities for social advancement; instead a small elite lives comfortably of the returns of its assets. This is Piketty’s dystopia. Money nobility increases wealth, it’s capitalism without its meritocracy backbone.

Piketty knows, of course, that there is no linear process to ever increasing income and wealth concentration. So what explains the exceptions to the rule? For him the two world wars (and the consequent destruction of the physical and monetary value of capital) were powerful forces reducing inequality. Add to this the expansion of progressive taxes on income and assets (including inheritances). Incidentally, it was not until the 1970s when the leading industrial nations started to dismantle progressive taxes (e.g. Kemmerling 2009), and inequality rose again sharply. The result is a renaissance of the 18th century rentier society, which could well leave its stamp on the 21st century.

It comes with no great surprise that Piketty’s major policy recommendation is a global and progressive tax on capital. Piketty is well aware that this demand sounds utopian. However, he considers it quite feasible in a confined space such as the OECD and the EU.

How did critics respond?
Soon different camps evolved: those with balanced views (e.g. Bill Gates but also left economists such as James K. Galbraith and David Harvey), enthusiasts (e.g. Paul Krugman and leaders of the left feuilleton) and predominantly critical ones (many ‘orthodox’ economists like Daron Acemoglu, Gregory Mankiw, and Deidre McCloskey). I will restrict myself to four major points of criticism: measurement error, the definition of capital, the law (r> g), and the underlying ethics.

In the wake of the Reinhart-Rogoff scandal, the Financial Times (Giles 2014) framed Piketty’s work into one with gross measurement errors and arbitrary assumptions. In fact, Piketty’s approach is not ideal in many respects (see Milanovic 2013). However, the transparency is exemplary in the data generation and the substantive results seem to be robust (en passant, Piketty was not the first to state a u-shape evolution of inequality over time). Perhaps because of this the criticism quickly ebbed away (as opposed to Reinhart and Rogoff).

Piketty’s concept of capital is more troublesome. The main criticism is that Piketty excludes human capital from his calculations. He must do this because a long historical time series of human capital is impossible (is a law degree nowadays still worth the same than 200 years ago?). In more general, human capital is a controversial concept especially in its empirical operationalization even nowadays. Nevertheless, the criticism is valid in the sense that including human capital could change the picture if you – quite plausible – assume that the importance of education increases over time. However, in some respects the criticism is also petty, because Piketty often refers to returns to human capital, albeit less systematically.

For most economists r > g and the underlying assumption of automatic concentration of wealth is the real Achilles heel. The counterfactual reasoning here is why the descendants of the Rockefellers (or why not: Fuggers or Roman Cesars) are no longer today the richest in society. Many economists use their classical instruments to invalidate Piketty’s main thesis: decreasing returns to scale of capital; the elasticity between labor and capital, the role of depreciation; unrecognized risk component of financial returns; dynasties’ limited natural life, neglected dynamics in innovation and imitation … The list of omissions is long. This discussion is of interest for economists, and it may also be relevant for some political economists. However, even if the importance of inherited wealth concentration should be less important than Piketty claims, one can hardly describe it as trivial. And more fundamentally, there is still tremendous inequality, no matter where it comes from. It is therefore probably the greatest achievement of Piketty to have rekindled the discussion about the rising inequality in rich countries.

The most fundamental criticism – and I think the one most deeply engrained in many economists’ psyche – is ethical in nature. Deidre McCloskey (2014: 105) summarized it with ‘So What?’: Why is inequality important? For most economists equality is not an end in itself, but only relevant with regard to something else, for instance if inequality leads to loss of efficiency. McCloskey takes this criticism to the point: “[Piketty’s] social theme is a narrow ethic of envy.” But if the ethical basis for Piketty’s advice is false, then a global capital tax is nothing more than global capital punishment (Tyler Cowen 2014 ).

What can we learn about the state of the economy (and economics)?
The policy recommendation of a global capital tax seems a bit one-sided, in fact. For political scientists it is quite clear that a variety of welfare-state arrangements help to reduce inequality. In international comparisons it rather seems to be the level of welfare state effort than the progressivity of the tax system which reduces inequality (e.g. Mahler and Jesuit 2006). In general, the political dimension and the use of other than economic sources are somewhat scarce. Maybe because of this, Piketty fares less well in explaining the large differences between countries.

When it comes to his contribution to economic theory, Piketty is certainly in part to blame. He boosts his fundamental law of r> g quite triumphantly and provocatively (which is what he wants, it seems). In his book he is much more nuanced than the academic controversy on the ‘iron law’ suggests. For example, he discussed inequality among employees and above all the galloping remuneration of top managers. The critical engagement between Piketty and his critics shows, however, how controversial the notion of capital as the fundamental concept of modern economics really is. Modern economics has not recovered from this childhood disease, but at best glossed over it, and deep problems – for example, the Cambridge (USA) vs. Cambridge (England) controversy – shine through again and again in current discussions. Knowledge produced in economics is not always so cumulative and uncontroversial as leading scholars would have it.

However, much more blatant is the fact that many economists have a kind of inequality-aversion aversion. Distribution is either not a problem, or just a subordinate one. Even Piketty is not completely immune to this tendency. First, and not untypical for an economist, he devotes relatively little space to normative theory. Second, he also assigns inequality or rather equality more of an instrumental than an intrinsic value. Inequality is a problem in so far as rentiers earn more money than entrepreneurs and innovators do. This creates an incentive problem to which economists can relate to. Besides the fact that this argument is somewhat shaky (if someone has no capital, his only chance to ascend socially is to work and to be innovative), it leads to a classical problem: when someone can show that the consequence of inequality for efficiency is not so bad, there is no concern about inequality and the book is so worthless. McCloskey: ‘it is a brave book. But it is mistaken. (2014: 112)’

This criticism is grossly exaggerated in two ways. First, economists measure the instrumental value of equality mostly in efficiency loss. Only if inequality endangers economic growth, the concern is justified, otherwise not. In recent years, the pendulum seems to swing in Piketty’s direction (eg Cingano 2014), but the wind can turn quickly here. If so, inequality would not be a problem anymore. However, inequality also has significant consequences other than for efficiency and growth. For example, one of the few robust macro correlations in international comparisons is between violence in a society and the degree of economic inequality. Also, the democratic process in economically extremely unequal societies is difficult to imagine. Rather ironically, this comes to the open when spare-time historian and top income earner Gregory Mankiw explains to a rather incredulous professional audience that inequality in the days of slavery did not have any negative impact on U.S. democracy (Matthews 2015). So, if you lead an instrumental strategy against the concern of inequality in the field, it is necessary to reflect the consequences of inequality in all major social dimensions. The case for refuting inequality as a problem will become more difficult.

Another ethical strategy, however, is to give equality the status of an intrinsic value and thereby provide it with an equal footing compared to other values such as prosperity. There are many good reasons for such a strategy. For instance, people often show a very strong aversion to inequality, and not because they are concerned about the consequences, but because they value equality as a state. Such an ethical strategy to defend equality is rejected by some economists on a regular basis. It is dismissed as social envy. This is all the more remarkable because economists readily exploit another bad trait of the human species, greed, and harness its potential for capitalist innovation. But if greed as a bad trait can have positive effects, then why cannot social envy be the fundament on which to build an equitable society? Economists still measure here with a double standard. Other social and behavioral scientists will find this double standard perplexing.

At rock bottom the crucial normative question is: at what level of inequality is it a problem in itself? No scientist can give a precise quantitative estimate for this; the answer needs to be determined democratically. However, it is precisely the fundamental problem of Piketty: When will the level of inequality be such a serious problem, such a serious violation of social solidarity, that intervention is necessary, even if it came at the expense of other values such as efficiency or prosperity? Piketty provides an interesting, if not always consistent answer. It is to the question, however, to which Piketty has given an enormous boost.


Cingano, F. (2014) ‘Trends in Income Inequality and Its Impact on Economic Growth’ ‘. SEM OECD Working Paper No. 163rd
Cowen, T. (2014) ‘Capital Punishment. Why a Global Tax on Wealth Will not End Inequality ‘. Foreign Affairs May / June 2014th
Ellenberg, J. (2014) ‘And the summer’s most unread book is … Wall Street Journal July 3rd
Giles, C. (2014) ‘Piketty’s Findings undercut by Errors’. Financial Times March 23, 2014th
McCloskey, DN (2014) ‘Measured, unmeasured, mismeasured, and unjustified pessimism: a review essay of Thomas Piketty’s Capitalism in the twenty-first century’. Erasmus Journal for Philosophy and Economics 7 (2): 73-115.
Mahler, VA, & Jesuit, DK (2006) ‘Fiscal redistribution in the developed countries: new insights from the Luxembourg Income Study’. Socio-Economic Review 4 (3): 483-511.
Matthews, D. (2015) ‘The worst argument against Thomas Piketty yet’., 7th, 2015).
Milanovic, B. (2013) ‘The return of “patrimonial capitalism”: review of Thomas Piketty’s Capital in the 21st century’. MPRA Paper No. 52384th
Kemmerling, A. (2009) ‘Taxing Workers on Low Wages: The Political Origins and Economic Consequences of Taxing Low Wages’ Edward Elgar.
Zucman, G. (2013) ‘The Missing Wealth of Nations: Are Europe and the US Debtors Net or Net Creditors’ The Quarterly Journal of Economics 128 (3): 1321-1364.



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4 responses to “The Piketty review to end all Piketty reviews (now in English)

  1. Pingback: Why Top Universities Feed on Income Inequality | Polidigwerkschdaeddle

  2. Injurede

    I apologize that I didn’t read the whole review, I skipped and covered some of the main points of criticism. Some of it is quite relevant, but doesn’t go nearly far enough. You focus on inequality growing in rich countries: “It is therefore probably the greatest achievement of Piketty to have rekindled the discussion about the rising inequality in rich countries.” Which ignores the fact that global inequality is decreasing. Changing demographics, investing in developing countries, among other things, has caused inequality to rise in the developed world…and yet overall it’s declined. That isn’t trivial in the slightest. That, mixed with the fact that capital income has stayed relatively constant as a percentage of overall income, and more and more people are investing via financial intermediaries so that they too can take part in capital returns, shows that this is becoming less and less relevant. An example:

    “To see why, suppose Karl is a worker who earns £1 a year. His wage grows at a rate of g=0.01, or 1 per cent a year.

    By contrast, his friend Friedrich is heir to a fortune worth £100 that earns a return of r=0.04, or 4 per cent a year. Assume as well that both save at a rate of s=0.05, or 5 per cent of their income each year.

    In year one, nasty rentier Friedrich enjoys an income four times larger than Karl without having to work. How much income does each receive in year two? Karl gets £1.01 in wages, and collects an additional 2/10th of one penny in interest on his savings. Friedrich’s capital has grown to £100.2 and that pays him the same income of £4 plus an additional 8/10ths of one penny. Carry this forward and it will become apparent that Karl’s income grows faster than Friedrich’s, and eventually overtakes it. It will take 155 years, but the direction of travel is what matters here. ”


    I’d think most of this really destroys Piketty’s arguments. Not to mention he doesn’t consider things like widespread tax evasion when we had high marginal tax rates.

    Over-simplifying the world does just that. It opens you up to widespread criticism. Of course, if you write a 700 page book that doesn’t really have a peer-review process, you can say what you want and dodge most major criticism. There are so many points to bring up that it seems like throwing spaghetti at a wall and seeing what fits, but it’s all very relevant.

    I will say one of the better points you raised was the ethics. The question is “does inequality really slow growth, decrease living standards, or hurt overall wellbeing?” Most studies have mixed results, but I’d say more lean towards inequality not hurting for advanced countries, but it does hurt for poorer countries. Pointing towards different types of inequality. If you have cronyism, an authoritarians stealing resources, income, and limiting growth to keep their power, that’s a very different type of inequality. One that wouldn’t be productive in advanced economies, but isn’t BECAUSE of inequality. If people who are politically connected abuse their power, capture regulators, pay lower marginal tax rates, and so forth, that’s more related to changes in different policy. A wealth tax would do little to stop this.

    • Thanks for your reply. You raised a lot of good points. The peer review argument is true to some extent, although the empirical pieces (with Saez and Atkinson) have been put to the test and survived. And I treat the question mainly as an empirical one: in this respect the middle class investing in financial asset has not compensated the dramatic rise of high incomes in rich countries. This is what the data shows. And this is what the book is concerned about.

      I think we should be concerned. I am not entirely sure why inequality should be qualitatively different from inequality in poor countries. I get the idea that inequality in countries with hunger and starvation are much more intense, but rich countries for a long time were concerned about inequality, e.g. the U.S. at the end of the 19th century, and for good reason.

      In this respect, falling inequality in developed countries (mainly China and India) does not compensate rising inequality in rich countries in general. This is only true from a world income perspective. But the world is politically fragmented into a state system, and even the poorest countries should be concerned about high inequality in politically more powerful rich countries.

  3. Pingback: Living In An Unequal World: Tackling with Economic Concerns and Financial Crises | EUSVox

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