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A Return to Gilded Age Inequality? Thomas Piketty’s Capital in the Twenty-first Century

Thomas Piketty interviewed

By Johnathan Mills


Thomas Piketty’s Capital in the Twenty-first Century captured the zeitgeist surrounding the issue of inequality when it was released in 2013. That a 700 page book filled with historical economic data sat atop the bestseller list speaks to the salience of the issue at this moment. At its core, Piketty’s argument is simple. During most of history, the return on capital outpaced the growth of the economy as a whole, a dynamic which Piketty says drives inequality. The wealthy garner outsize gains on capital relative to modest gains in wages, and this effect is compounded over generations of inherited wealth. This dynamic held for many hundreds of years, until the post-World War era, when a variety of factors allowed the rate of economic growth to overtake the rate of return on capital. Piketty argues that that this period is a historical aberration, and that current trends suggest a return to the historical norm where the return of capital outpaces economic growth and the distribution of wealth returns to that of the Victorian era.

Last week, I looked at economist Joseph Stiglitz’s work on wealth inequality, and his particular focus on how policies and institutions have driven the ever-widening gap between the rich and poor. Stiglitz’s assertion is that the level of inequality we see today is not a natural result of the market, but is instead a result of policy choices.

While Stiglitz focuses on the policies and institutions that cause inequality and Piketty on the ‘natural’ tendency for capital to accumulate and lead to inequality, their analyses are compatible. Policies since about 1980 have affected the value of labor income relative to income from capital, which, as Piketty suggests, was pursuant with a rise in inequality. A decrease in the capital gains tax, obviously, increases the take-home share of income from capital. Furthermore, the top marginal income tax rate has fallen considerably since 1980, which means more of that income can be devoted to investment. The gap between those depending solely on income and those who can afford capital investment thereby widens.

While a number of factors may explain the post-WWII decline in inequality—not least of all is the destruction of capital which occurred during the war and the unprecedented economic growth that followed it—it’s worth noting that taxation was much more progressive during that period than it was after 1980. This fact might lead one to believe, as Stiglitz does, that inequality is not inevitable and is within our power to control.

To counteract the effect he describes in Capital in the Twenty-first Century, Piketty recommends a global tax on wealth, as well as increased investment in education. Piketty names the dissemination of knowledge as a force of convergence both on a national and individual level, meaning that inequality decreases where there’s open access to quality education. Education is crucial in making the transition to an economy where labor is increasing automated and there is a rising demand for skilled labor. Additionally, he has proposed replacing property taxes with a progressive tax on net wealth. Taxing net wealth (assets minus debts) would not only decrease the tax burden on those struggling to keep up with their mortgages, but it would also address the problem at the center of Piketty’s book—the inherent advantage of capital over labor income.

What emerges from both Piketty’s and Stiglitz’s analyses is that the current trends in inequality suggest a return to Gilded Age-like distribution of wealth. Like the vast disparities of that era, the state of inequality today is not sustainable and will require a shift in economic policy.

Image courtesy of the European University Institute

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