Capital in the Twenty-First Century

Thomas Piketty, an economist at the Paris School of Economics, spent more than a decade with colleagues including Anthony Atkinson and Emmanuel Saez rebuilding the history of top incomes from tax records. This book turns that work into one large argument: when the rate of return on capital (r) exceeds the growth rate of the economy (g), as it did for most of history, wealth concentrates and inheritance matters more than work.

It reached number one on the New York Times hardcover list. Paul Krugman called it superb and said it changed how economists talk about wealth. Lawrence Summers praised the top-income data as conclusive but disputed the theory, arguing that returns on capital diminish as it piles up and that the rich spend a good part of their returns.

The criticism is part of what a finance reader should take from it. Summers and Krugman both noted that most of the recent rise in the American top 1% comes from pay, not capital income. The Financial Times questioned parts of the wealth data, and Matthew Rognlie argued that rising house prices account for most of the growth in capital's share. Piketty's remedy, a progressive global tax on wealth, is one he concedes is politically remote.

Read it for the long-run series on capital-to-income ratios and returns, useful to anyone thinking about asset prices, savings or taxation, then read the critiques.

1. r > g is the core inequality. When after-tax returns on wealth exceed growth for long periods, existing fortunes grow faster than incomes, and inherited wealth gains ground on earned income.
2. The postwar era was unusual. Piketty attributes the compression of wealth between 1914 and 1970 to wars, the Depression, inflation and high taxes, so extrapolating from that period understates how concentrated wealth can become.
3. Capital/income ratios are rising again. Private wealth in rich countries has climbed back toward multiples of national income last seen before World War I, which matters for asset prices and expected returns.
4. American top incomes are mostly pay. The surge in the US top 1% since 1980 comes largely from executive and finance salaries, which Piketty links to lower top tax rates and weaker norms around pay.
5. Read the data critiques too. Summers on diminishing returns and spending, Rognlie on housing and depreciation, and the Financial Times on data errors show where the theory is weakest and how sensitive the conclusions are to definitions.

After an introduction that sets out the r > g framework and the data project behind it, the book proceeds in four parts and sixteen chapters.

1. Income and Capital. Defines national income, capital and the capital/income ratio, and sets out the long history of population and output growth, which supplies the g in his inequality.
2. The Dynamics of the Capital/Income Ratio. Traces how the form of capital changed from farmland to housing and business assets in Britain, France, Germany and the United States, how war and inflation destroyed wealth in the twentieth century, and why the ratio is climbing again.
3. The Structure of Inequality. Separates inequality of labor income from inequality of capital ownership, uses Balzac and Austen to illustrate nineteenth-century rentier society, examines the rise of executive pay in the United States, and compares merit and inheritance over the long run.
4. Regulating Capital in the Twenty-First Century. Discusses the social state, argues for steeply progressive income taxes, proposes a global progressive tax on capital, and considers ways of dealing with public debt.
5. Conclusion. Restates r > g as the central contradiction of capitalism as Piketty sees it, and argues that policy, not markets, will decide whether a drift toward oligarchy continues.

The main driver of inequality--returns on capital that exceed the rate of economic growth--is again threatening to generate extreme discontent and undermine democratic values. Thomas Piketty's findings in this ambitious, original, rigorous work will transform debate and set the agenda for the next generation of thought about wealth and inequality.