Capital in the Twenty-First Century: Article Summary

Thomas Piketty’s article Capital in the Twenty-First Century discusses distribution of wealth, considering its past in the context of important historical factors as well as predicting its future based on its current state. It begins by outlining the inequalities that capitalism generates, explaining that it functions when the capital's rate of return is higher than output and income's rate of growth. As well, it briefly touches on capitalism today, explaining that it does not match Karl Marx's somber predictions due to factors such as knowledge diffusion and modern economic growth, but is nevertheless a prevalent problem. An effective demonstration of just how prevalent it is is the way in which great novelists have intuitively expressed the issues of wealth inequality in their works set between 1790 and 1830 in Europe. Such intuition not only allows regular people to sense the issue, but has also led to differing opinions on inequality even among experts, who the article recognizes as the first people that placed the distributional question in the center of economic analysis and posed the right questions.

Thomas Malthus believed that the cause of major transformations was overpopulation, since it increased land rents and stagnated agricultural wages in the 18th century, and caused the political regime of the time to be widely unpopular. Arthur Young travelled France's countryside and based on his observations declared the widespread poverty would eventually lead to political upheaval. To avoid just that, Malthus suggested that the poor must lessen their reproduction and be provided with less welfare. David Ricardo pinpointed the evolving land prices and rents as the sole issue of wealth distribution, since population and output will never cease to grow, land will become increasingly scarce in relation to everything else, and its price will continuously rise, making landowners the wealthiest of all people, with others unable to catch up. However, Ricardo underestimated technological advances and industrial growth, which made agriculture, and hence the need for land, far less pressing.

The article then introduces the concept of supply and demand, explaining it to mean that if a good's supply is low while its price is too high, then the demand will fall, which will decrease its price. After that it moves on to the 19th century during which the industrial proletariat were suffering from great wealth inequality, which was immense in the first half of the century, and levelled out the smallest bit in the second half, though workers still had very low wages. Meanwhile, industrial profits increased, which Karl Marx wrote about in The Communist Manifesto, calling the working class to unite against capitalists and predicting that capital has a tendency to concentrate in fewer hands over time. He turned out to be wrong in his predictions for the same reason as his predecessors – he underestimated technological progress.

Moving on to the 21st century, the article discusses Simon Kuznets, whose theory, which was the first of its kind to rely on statistics and objective data, and influenced by France's thirty glorious post-WWII years, stated that in advanced phases of capitalist development, income inequality would inevitably lessen. Kuznets considered income taxes and found that between 1913 and 1948 in the US there was a decline in income inequality by nearly 10 percent. This led to the fragile “Kuznets Curve” theory, which stated that income inequality will first increase, then, following industrialization, decrease.

The sources that the article used to study wealth distribution were placed in two categories, the first being those that deal with income's inequality and distribution, and the second being those that deal with wealth distribution and wealth's relation to income. Both have allowed the discussed issues to be successfully placed in an accurate historical context.

The article concludes that economic, social, and political factors should all be considered equally when studying wealth and income inequalities, since all contribute to it equally and intersect in doing so. As well, it concludes that there are powerful mechanisms that push waywardly toward convergence – reduction and compression of inequalities – and divergence – increasing levels of inequality. It identifies the main forces for each, with convergence's force being knowledge diffusion and investment in skills and training, as well as, supposedly, the progress of technological rationality over time. The forces of divergence, which may easily overwhelm those of convergence, are top earners easily being able to separate themselves from others, as well as an entire set of forces associated with accumulation processes and wealth concentration when growth is weak and return on capital is by contrast high. It is also mentioned that various external mechanisms can influence the basic forces for divergence. Right now, divergence forces appear to overwhelm convergence forces.

Two graphs are presented and analyzed in the article, one showing Income Inequality in the 21st century, which creates a “U” shape between the years 1930 and 2010. The other shows the divergent capital and income ratio in Germany, France, and Britain, outlining how between the years 1910 and 2010 all three also experienced a “U” curve. This curve is explained by regression to slowly growing economies, since when the rate of return on capital is much higher than the economy's growth rate, wealth will grow faster than output and income. The article proposes that divergence is not permanent, but is only one of the future possibilities.

The article then outlines the boundaries of its study, containing it to the world since the 18th century until today, and to France and Britain, since, due to France's unique history and revolution, its wealth structure is easy to observe, as well as due to it being the first country to experience the demographic transition. Finally, the article states that observing France will allow us to predict global wealth's future dynamics.