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post about capital in the 21st century

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rokob committed Jan 26, 2017
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+layout: post
+title: Capital in the Twenty-First Century
+date: '2017-01-23T22:24:52-08:00'
+categories: book
+tags: book great history nonfiction
+Every once in a while a book comes along that many people talk about wanting to read or bragging
+about having read and I often find it hard to get myself excited to read them.
+[*Capital in the Twenty-First Century*][capital-amazon] has come up in various discussions, radio
+programs, and articles over the past couple years. I have a background in economics and an interest
+in books that take very long term perspectives so this naturally made it on to my reading list. I
+have been putting it off for a while and finally just decided that it was time to get down to it. An
+exceptional book if only for the reason that he made the effort to collect the data and put forth a
+systematic analysis of wealth and income inequality throughout the world and over a span of more
+than 200 years. His interpretations of the data are not necessarily full-proof nor are his
+moral assumptions strictly universal, but this does not detract from a great piece of scholarly
+One of the best reasons to read this book is that data is presented which dispels many commonly held
+misconceptions about wealth both within certain countries as well as wealth and inequality in
+relative terms between countries, primiarly between the US and Europe. There are certain beliefs
+that seem to be common knowledge among a large proportion of the population, in the US at least,
+which are patently false. For example, the idea that America is owned or is increasingly being owned
+by foreign investors, the Chinese in particular, is put forth as a sign that certain policies or
+facets of government or industry are failing. The reality is that net public wealth is close to zero
+with any foreign holdings almost perfectly offset by corresponding domestic holdings of foreign
+capital. We do not have other countries to fear, the only fear for the average American should be
+from within our borders.
+The extremely short version of the book is that the relationship between the rate of return on
+capital, *r*, and the growth rate of output and labor, *g*, determines the level of inequality in the
+long run. If *r > g*, then without some intervening mechanism, wealth will tend to concentrate in an
+increasingly small minority of hands. We are most likely entering a period where *r* will remain
+basically stable and *g* will decrease. Therefore we are likely to see inequality get worse unless
+something is done to prevent this situation.
+While the book tries to emphasize that income inequality is not bad in itself, there is still a
+decently strong predisposed viewpoint that it is morally problematic for an individual to accumulate
+a significantly large amount of wealth, an obscene amount in colloquial terms.
+The author takes as a foundational assumption that one
+agrees with the statement "Social distinctions can be based only on common utility." from
+*Declaration of the Rights of Man and the Citizen*. How one interprets this defines the level of
+wealth deemed obscene. The extremes being that any amount of inequality is obscene and no amount of
+inequality is obscene. The real distinction seems to come from where the wealth came from and how it
+is being used. To benefit common utility the most, wealth should be distributed into the hands that
+will make the most productive use of it. In some cases, the most productive uses are to reward
+someone for labor that is itself productive. The incentive to work is a useful allocation of
+capital. The author agrees with this sentiment. Static wealth which only serves to grow itself is
+what is deemed obscene. Moreover wealth that is passed down across generations either via
+inheritance or gift is deemed to be essentially unfair and thus this source of wealth is seen as
+more obscene than the wealth obtained via labor income. While many people have this viewpoint, it is
+not necessarily universal. Cast in these terms it makes sense that the proposed policy to remedy
+inequality is a progressive global tax on capital. If you make productive use of your wealth above
+and beyond the tax rate and inflation rate, then it makes sense for you to have the wealth that you
+do. On the other hand, if tax plus inflation eats away your capital because you are not using it,
+then this redistribution is morally correct. That is the basic gist of the argument as I read it.
+One might ask why a progressive tax? There are a variety of arguments that appeal to morality,
+empathy, and social justice. These are all economically unappealing. However, there is a decent
+economic argument which allows one to skirt the moral quagmire. The rate of return is an increasing
+function of initial stake. In other words, larger fortunes can earn a greater return than smaller
+fortunes, ceteris paribus. There are a variety of reasons for this, but it is more or less an
+empirical fact. Hence, to force capital to be used dyanmically, one must institute a progressive tax
+to account for the increasing baseline return on capital.
+One issue I had with the book is the use of averages in certain areas. Many important parts are
+broken down into percentiles which allows for an accurate view into the distribution. However,
+within the say top 1% of the wealth distribution, we are left looking at average rates of return and
+the like. There are distributions in the other dimension that are also important. This issue is
+raised by the author and basically explained away frequently. It is very hard to present
+multivariate distributions in a way that is digestable in clear graphs or tables. I understand that,
+but some effort to even use medians or other percentiles in some places might have been nice.
+Overall I highly recommend this book. If you want to understand what wealth really means and how
+various rich countries are really organized around labor and capital, you need to read this book.

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