The Top of the World
Source Dave Anderson
Date 14/03/26/22:15
The Top of the World
An ambitious study documents the long-term reign of the 1 percent


The core message of this enormous and enormously important book can be
delivered in a few lines: Left to its own devices, wealth inevitably
tends to concentrate in capitalist economies. There is no "natural"
mechanism inherent in the structure of such economies for inhibiting,
much less reversing, that tendency. Only crises like war and
depression, or political interventions like taxation (which, to the
upper classes, would be a crisis), can do the trick. And Thomas
Piketty has two centuries of data to prove his point.

In more technical terms, the central argument of Capital in the
Twenty-First Century is that as long as the rate of return on capital,
r, exceeds the rate of broad growth in national income, g--that is, r >
g--capital will concentrate. It is an empirical fact that the rate of
return on capital--income in the form of profits, dividends, rents, and
the like, divided by the value of the assets that produce the
income--has averaged 4-5 percent over the last two centuries or so. It
is also an empirical fact that the growth rate in GDP per capita has
averaged 1-2 percent. There are periods and places where growth is
faster, of course: the United States in younger days, Japan from the
1950s through the 1980s, China over the last thirty years. But these
are exceptions--and the two earlier examples have reverted to the mean.
So if that 4-5 percent return is largely saved rather than being
bombed, taxed, or dissipated away, it will accumulate into an
ever-greater mass relative to average incomes. That may seem like
common sense to anyone who's lived through the last few decades, but
it's always nice to have evidence back up common sense, which isn't
always reliable.

There's another trend that intensifies the upward concentration of
wealth: Fortunes themselves are ratcheting upward; within the
proverbial 1 percent, the 0.1 percent are doing better than the
remaining 0.9 percent, and the 0.01 percent are doing better than the
remaining 0.09 percent, and so on. The bigger the fortune, the higher
the return. Piketty makes this point by looking not only at individual
portfolios but also (and ingeniously) at US university endowments, for
which decades of good data exist. The average American university
endowment enjoyed an average real return--after accounting for
management costs--of 8.2 percent a year between 1980 and 2010. Harvard,
Yale, and Princeton, in a class by themselves (with endowments in the
$15-$30 billion range), got a return of 10.2 percent a year. From that
lofty peak, the average return descends with every size class, from
8.8 percent for endowments of more than $1 billion down to 6.2 percent
for those under $100 million. In short: Money breeds money, and the
more money there is, the more prolific the breeding.

It was once believed, during the decades immediately following the
Great Depression and World War II, that vast disparities in wealth
were features of youthful capitalism that had been left behind now
that the thing was reaching maturity. This theory was first enunciated
formally in a 1955 paper by the economist Simon Kuznets, who plotted a
curve representing the historical course of inequality that looked
like an upside-down U: Kuznets's chart showed that disparities in
wealth rose dramatically during the early years of growth and then
reversed once a mature capitalist economy reached a certain (though
none-too-specific) stage of development.

Kuznets's curve fit nicely with the actual experiences of the rich
economies in what the French call the Trente Glorieuses, the "thirty
glorious years" between 1945 and 1975, when economic growth was
broadly shared and income differentials narrowed. In the United
States, according to the Census Bureau's numbers (which have their
problems--more on that in a moment), the share of income claimed by the
top 20 percent--and within that group, the top 5 percent--declined
during the glorious years. At the same time, the income of the
remaining 80 percent gained.

But in the United States, the thirty glorious years were actually
twenty-odd years; depending on how you measure it, the equalization
process ended sometime between 1968 and 1974, again according to the
census figures. Still, quibbles aside, the process of relative
equalization went on for long enough that it felt like Kuznets was on
to something with his curve. I say "relative" because these are still
not small numbers: The richest 5 percent of families had incomes about
eleven times those of the poorest 20 percent in 1974, the most equal
year by this measure since the census figures started in 1947. But
that number looks small now compared with the most recent ratio,
almost twenty-three times in 2012.

While those census numbers--and similar statistical efforts based on
surveys of households elsewhere in the world--are useful in outlining
broad trends, they have a few serious problems. Most important, they
don't account for the very rich, a topic of extreme voyeuristic and
political interest. Plutocrats do not answer surveys. The Federal
Reserve does a triennial Survey of Consumer Finances that makes
special efforts to cover the rich, but by design the members of the
Forbes 400 are excluded--for reasons of privacy, according to the
survey's documentation. For serious analysis of the seriously rich,
one needs to look at tax data, which is what Piketty (and his sometime
collaborator Emmanuel Saez) has done.

Piketty's study is largely confined to a handful of rich countries--the
United States, Britain, France, Germany, and Japan. These economies
have the best data over the longest period of time--and besides, if
you're studying wealth, these are the countries where the moneyed have
disproportionately lived. The French data is particularly detailed,
because the French Revolution instituted an elaborate registry of
property. The French didn't do much to redistribute wealth--it was,
after all, a bourgeois revolution--but they did a lot to catalogue it.

Most rich countries introduced income taxes in the early twentieth
century, which made it possible to study the volume and structure of
incomes with some precision and detail. But it's possible to journey
further into the past for estimates of aggregate incomes and of the
value of the capital stock. And indeed, much of Capital in the
Twenty-First Century is devoted to outlining the contours of the value
of that capital stock relative to incomes--an effective way of
analyzing capital's relative heft over time. For Britain and France,
the total value of the capital stock--owned, as is almost always the
case, largely by the 1 percent (whether aristocrats or members of the
bourgeoisie, whether it's France in 1780 or the United States in
2014)--was about seven times national income from 1700 until around
1910. (National income, roughly speaking, is the sum of all forms of
income in a given economy--wages, profits, interest, dividends, and so
on.) With two world wars and a depression, the capital stock fell to
about three times national income. (Curiously, Piketty notes that the
monetary destruction of paying for war through taxes and inflation did
more damage to the capital stock than the physical destruction of
combat itself.) It began to recover around 1950, but was inhibited by
extremely high tax rates in the first postwar decades. As of 2010, the
capital stock had recovered to between five and six times national
income in Britain and France. Data begins later for Germany, but the
pattern isn't dissimilar: a stock of capital about seven times
national income in 1870, hammered down to just over two times in 1950,
and a recovery to four times in 2010. The trajectory for the United
States is much less dramatic: A capital stock of around three times
national income in 1770 rose steadily to five times on the eve of the
Great Depression, fell to about four times in 1940, but began
recovering quickly, rising back steadily toward five times in 2010.
The Second World War did little damage to the American rich, who
largely inherited Britain's empire with the coming of peace and the
Yalta accords in 1945.

Many interesting details emerge in Piketty's treatment of US economic
history. Despite our distinction as the most unequal of the major
economies today, America was a relatively egalitarian place (for white
people) in the nineteenth and early twentieth centuries. But, speaking
of white people, the liberation of the slaves after the Civil War was
probably the greatest expropriation of capital in history. If one
counts slaves as wealth--which, grotesquely, was how American society
defined them from the country's founding through 1865--their value was
about 150 percent of national income throughout the slavery era. And
practically overnight, with Lincoln's 1863 Emancipation Proclamation,
they were no longer someone's property.

After that, though, America largely lost its expropriating nerve. Not
entirely so, however: Piketty reports that it was politically easier
for America to institute the income tax in 1913 than it would be in
European economies, given residual populist resentment of the rich.
That, and endless waves of immigration, which continuously upset the
economic hierarchy, kept the United States more egalitarian than
Europe into the 1970s. From that point on, although the rich got
richer nearly everywhere, the United States became the affluent
world's undisputed inequality champ. It's also more unequal than lots
of "emerging" countries, such as China and India.

Remarkably, despite those broad gyrations over the last two centuries,
many continuities stand out in Piketty's historical narrative. One is
the stability in the rate of return on capital--the same 4-5 annual
percentage, decade in and decade out. Another is the preponderance of
that magic 1 percent figure, which seemed like a polemical
simplification in the Occupy days, but clearly has an actual
historical basis.

But something has changed within that 1 percent: While it was once
dominated by a population of rentiers, coupon clippers who barely
worked if at all, it is now dominated, especially in the United
States, by a group of star CEOs and financiers who flatter themselves
that they're being paid for their extraordinary talents.

Economics as a discipline loves stories about equilibrium and
convergence. Vast inequities should, in theory, be "competed away," as
neoclassical economics likes to say. But mostly they're not. Globally,
poorer countries should gain on richer ones as technology and
education spread and mobile capital's search for higher returns makes
the poor less poor. That has happened to some degree, but rapidly
developing economies such as India and many African nations remain
much poorer than the United States or Western Europe. In the case of
personal wealth, old fortunes should decline and be replaced by new
ones, just as manual typewriters were replaced by electric ones, and
electric typewriters were superseded by computers. But in fact old
money is remarkably persistent. Yes, we've seen the creation of a
large number of new fortunes over the last few decades, a change from
wealth's dark days of the mid-twentieth century. Bill Gates is the son
of a well-off lawyer who was nowhere near a billionaire; Mark
Zuckerberg sprang from the loins of a dentist and a psychiatrist. They
are the very picture of modern new wealth. But despite those new
fortunes, inheritance remains very important. David Rockefeller, worth
$2.8 billion at the age of ninety-eight, is number 193 on the Forbes
400. Overall, Piketty concludes, it's likely that half or more of the
wealth of the upper orders originates in inheritance.

And though Piketty doesn't explore this, I've long suspected that a
major force for the repeal of the estate tax in the United States has
been that the billionaires of the neoliberal age--the tech and finance
moguls, some famous, some barely known--have been thinking about their
legacy. The scions of the second Gilded Age want to see their
grandchildren on the Forbes 400, just like David Rockefeller is a
ghost of the first Gilded Age. I'm less sure whether they want to see
their names on traditional foundations--maybe more the entrepreneurial
kind. But it's clear that the political salience of the "death tax" is
a reflection of a cadre of fortunes of a sort that was long out of

Piketty's book could have done with a pruning. It is original and very
important, and deserves a wide audience. But even a connoisseur gets
winded after four hundred pages, much less six hundred plus. It's
often wordy and repetitive. But it is not in any sense heavy going.
The prose is clear, and there's a minimum of math--Piketty, a professor
at the Paris School of Economics, has little taste for conventional
(meaning mostly American) economics. Early on, he is critical of his
discipline's "childish passion for mathematics" and its lack of
interest in other social sciences or culture. He often refers to
novels, particularly those by the likes of Austen and Balzac, that
illuminate the world of wealth--something you'd never find in the
latest number of the American Economic Review. And he takes passing
swipes at prestigious US academic economists, who generally find
themselves near the top of the income distribution and who, not
coincidentally, believe that that distribution of income is just and

But the major frustration of the book is political. Piketty clearly
shows that short of depression and war, the only possible way to tame
the beast of endless concentration is concerted political action. The
high upper-bracket tax rates of the immediate postwar decades couldn't
have happened without serious fears among elites--fresh memories of the
Depression, threats from strong domestic unions, competition on a
global scale with the USSR, which, for all its problems, was living
proof that an alternative economic system was possible. As those
things waned, upper-bracket taxes were lowered, wages and benefits
were cut, and capital's increased mobility led to increased
competition among jurisdictions to offer a "favorable investment
climate"--meaning weak regulations, low wages, and minimal taxes. All
these trends have contributed to the concentration of capital over the
last thirty years, as wealth and power have shifted upward on an
enormous scale. None of these features will be reversed spontaneously.
Nor will they be altered through "democratic deliberation"--several
times Piketty notes the hefty political power of the owning class--or
improved educational access, as Piketty actually urges at one
unfortunate point. Brushing up the working class's skill set is no
match for the power of r > g.

Starting with the title, the eternally recurrent specter of Marx hangs
over this book. Early into the first page of the introduction, Piketty
asks, "Do the dynamics of private capital accumulation inevitably lead
to the concentration of wealth in ever fewer hands, as Karl Marx
believed in the nineteenth century?" Phrasing the question as
something grounded in the past is a nice distancing technique, as the
psychoanalysts say, but the answer is clearly yes. Several times,
Piketty disavows Marx--just a few lines later he credits "economic
growth and the diffusion of knowledge" for allowing us to avoid "the
Marxist apocalypse"--but he also concedes that those prophylactics have
not changed capitalism's deep structures and the tendency for wealth
to concentrate. It seems, in other words, that Piketty's own research
shows that the old nineteenth-century gloomster had a point.

Unlike most modern economists, Piketty at least credits Marx's
ambition and profundity. But for Piketty, the main problem with Marx
is his unequivocal call for political confrontation. Having described
a process of inexorable material polarization--and with it, increasing
plutocratic power over the state--Piketty remains distressingly
moderate as he sounds out some of the political implications of his
analysis. A major reason for his posture of socialist skepticism, he
declares, is that he came of age as Soviet-style Communism was falling
apart, which left him "vaccinated for life against the conventional
but lazy rhetoric of anticapitalism."

Anticapitalist rhetoric need not be lazy--and for all the empirical
sophistication of Piketty's work, his political thinking is hardly a
model of complexity or effort. He mostly aspires to contribute to
rational democratic deliberation about "the best way to organize

Still, while such deliberation is clearly necessary, political action
cannot be factored out of that process just because we happen to have
lived through the Cold War's unmourned collapse. It's energizing to
see that a younger generation of political intellectuals, who were in
grade school when the Berlin Wall came down, missed the anticapitalist
vaccination. They might be able to take Piketty's data and cause some
genuine trouble with it. Because serious trouble--demonstrations,
strikes, insurgent political movements--is what it will take to derail
capitalism's inevitable tendency toward concentration. Short of that,
it looks like we'll be continuing our journey along the road to a new

Doug Henwood is editor of the Left Business Observer and host of
Behind the News, a weekly radio show originating on KPFA, Berkeley. He
is working on a study of the American ruling class.

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