It was Sir Francis Bacon who said that “some books are to be tasted, others to be swallowed, and some few to be chewed and digested.” Today, most political types prefer their brain food in smaller portions. A speech or a pamphlet perhaps – with a blogpost or two for afters.
Unfortunately, not every book can be spurned. Occasionally, somebody writes one that won’t go away. Right now the leading example is Thomas Piketty’s Capital in the 21st Century – almost certainly the most important economics book of the year and quite possibly the decade.
At any rate, it’s the talk of the town – which in the Westminster village means you’d better have something to say about it. Not that you have to read the thing – that’s what book reviewers are for.
One of the best (and shortest) reviews of Picketty’s monstrous 577 page tome is by Greg Mankiw – a Harvard professor and policy advisor to Mitt Romney and George W Bush. If nothing else, it’s interesting to see what a rightwing economist thinks of what is, broadly, a leftwing critique of contemporary capitalism.
Describing the book as a ‘truly impressive work’ Mankiw provides a brief guide to its contents:
“The book has three main elements:
“A history of inequality and wealth.
“A forecast of how things will evolve over the next century
“Policy recommendations, such as a global tax on wealth.”
Given that Mankiw doesn’t like Picketty’s politics why does he like his book? The answer is that it represents a huge achievement of economic scholarship. Picketty and his academic colleagues have demonstrated that the distribution of wealth – and not just income – is becoming increasingly concentrated in the hands of the super-rich in countries around the world, including Britain.
Indeed, viewed over the last hundred years, levels of inequality are back at levels last seen in the decades before the Great Depression. One could argue that if this is the price we must pay for a growing economy then it is in all our interests to pay it. However, the fact is that western economies grew faster in the era of falling inequality than in the subsequent era of rising inequality.
Picketty believes that these trends will continue. As long as the return on capital (“r”) is greater than economic growth rate (“g”), then the rich, who already have capital, will take an even greater share of our national wealth with every generation – until they own just about everything.
Mankiw has his doubts about this:
“…the leap from r>g to the conclusion of a growing role of inheritance in society seems too large to me. Many capital owners consume much of the return on their capital, so wealth does not grow at rate r. This consumption ranges from fancy cars and luxurious vacations to generous charitable giving. In addition, unless mating is perfectly assortative, or we return to an era of primogeniture, wealth per family shrinks as it is split among children.”
One thing is for sure: Conservatives need to have a positive alternative to Picketty’s proposed solution of confiscatory wealth taxes, which are more likely to hit ordinary people than those who can afford crafty lawyers and accountants.
If “r>g” really is the big economic story of our time, then the right response is as follows: (1) champion higher growth as a driver of greater equality; (2) stop artificially increasing returns on capital (i.e. through quantitative easing and bank bailouts); and (3) work to spread the ownership of capital throughout society.