Some things that I’m excited about:

  1. Thomas Piketty is delivering the 13th Annual Nelson Mandela lecture tomorrow; and
  2. More importantly, I have a ticket.

There have been some preliminary lectures and interviews leading up to that – so according to Moneyweb, I should expect to hear something along the lines of:

“South Africa is very unequal and did not become more equal after the end of apartheid, at least not as much as some people would have hoped. In some way, it has even become more unequal if we take the concentration of incomes in the top groups of the people.”

…followed by…

“Many successful development experiences in Europe and also in Asia did at some point in their trajectory use land reform and other forms of direct redistribution of property much more than South Africa did. You never had this kind of big phase of redistribution of property and probably that explains why the legacy of apartheid is still very much there in terms of inequality.”

Juicy stuff!

Andile Mngxitama must be wetting himself (that’s a link to his recent interview on the ZAR podcast where as a white person I was called a land thief numerous times – even though I own no land).

That said, I’m being unnecessarily facetious here. I do agree that there is validity in saying that people need to have skin in the game, otherwise there is a temptation to vote based on patronage, which creates all kinds of bad incentives for policymakers.

Anyway – I’d like to hear what Mr Piketty says in person before I start getting free and frisky with the critiques. So in the interim, here is the long-ish summary of his big book “Capital in the Twenty First Century” that I posted last year:

Das Kapital, Yah.

Thanks this website
Thanks this website

Thomas Piketty is a French economist at the Paris School of Economics, and his book Le Capital au XXIe siècle has been released in English as “Capital in the Twenty-First Century”. People are referring to it as Karl Marx: the sequel. Even Paul Krugman is excited:

“Piketty has written a truly superb book. It’s a work that melds grand historical sweep – when was the last time you heard an economist invoke Jane Austen and Balzac? – with painstaking data analysis… This is a book that will change both the way we think about society and the way we do economics.”

The Book In A Nutshell

  • Orthodox Economics has capitalism all wrong.
  • We’re not moving forward into a world of more equality, we’re moving backward into a world of dynastic wealth.
  • And tbh, in the long run, no one gets rich by earning a salary – they get rich by earning passive income off their investments.

For most of us, each day is spent going to work and earning a salary. Then, on the 25th of the month, you get a message on your cellphone to tell you that money has landed in your account. Is this the path to riches though?

According to Mr Piketty, that answer changes depending on the time period in which you’re working. Because if you returned to the 18th and 19th centuries, the answer was no. And he begins by looking at the socio-economic structures you find lurking in the background of the plot-lines in Austen and Balzac.

In Honoré de Balzac’s book Le Père Goriot, the young Eugène de Rastignac is a law clerk who has moved to Paris in pursuit of wealth. The criminal agitator Vautrin sits him down and explains how rising through the professional ranks might make him better-off, but if he really wanted to be wealthy, he’d have to marry rich. He then identifies an eligible heiress who he thinks Rastignac should marry, and offers to help “remove” any obstacles (specifically, her brother) to clear the way to her father’s inheritance.

When Piketty and his team went and laboriously assembled the data from that period, they found that anecdote to be more than just anecdotal. Wealth was focused in the hands of the owners of capital, and the only way to step out of your income bracket really was to marry into money.

What Happened in the 20th Century

In the early 20th Century, global society went through two World Wars and a depression.

Some quotes from John Cassidy’s article in the New Yorker:

In Europe, two World Wars and the progressive tax policies that were needed to finance them did enormous damage to the old estates and great fortunes: many rich people, after paying their income and inheritance taxes, didn’t have enough money left to replenish their capital. During the postwar era, inflation ate away at their savings. Meanwhile, labor-friendly laws enabled workers to bargain for higher wages, which raised the proportion of income that labor received. …

In the United States, the story was less dramatic but broadly similar. The Great Depression wiped out a lot of dynastic wealth, and it also led to a policy revolution. During the nineteen-thirties and forties, Piketty reminds us, Roosevelt raised the top rate of income tax to more than ninety per cent and the tax on large estates to more than seventy per cent. The federal government set minimum wages in many industries, and it encouraged the growth of trade unions.

The income of the top 1% dropped dramatically. And that wasn’t restricted to Europe and the United States – the pattern was mirrored across the world. Some graphs that I found in a second New Yorker article:

income inequality in Anglo-saxon countries

income inequality in emerging countries

With these trends in play, economists in the mid-50s began to view inequality as resolved – or, rather, as something that diminished as a country advanced. And so economists dealt with this new advance in the world by developing a graph for it. It was famously hypothesised by Simon Kuznets in the 1950s and 1960s.

The Kuznets Curve


The explanation goes something like this:

  • inequality rises during the early stages of industrialisation (as some entrepreneurs do better than others)
  • but then incomes start to converge (as competitive forces allow economic agents to argue for more equal portions of the pie)
  • and income inequality falls as living standards rise

And empirically speaking, this was happening. Until the 70s, when the inverted-U-curve started to invert back to being a plain old U.

updated kuznets curve

Piketty’s argument is that the Kuznets curve was actually just an anomaly. His words:

A concatenation of circumstances…created a historically unprecedented situation, which lasted for nearly a century. … All signs are, however, that it is about to end.

In Piketty’s interpretation of economic history, most of the 20th century was just an anomaly – a situation where the growth in wages was higher than the returns offered by capital.

Or, in layman: an unusual period of time when you could get richer off your salary than you could off your investments #sunshine #makehay #rainacomin

The Piketty Interpretation

The past century has lulled us into believing that the key mechanism for inequality is salaries and wages. And if you could just get into the right industry at the right time, then you’d get wealthy off your bonuses and salary increases. Oh – and capital is just this amorphous factor of production.

But even intuitively, this seems false. We use the phrases in conversation all the time: “the rich keep getting richer”, “it takes money to make money”, etc. And we look with envy at the property tycoons and the business-owners and the holders of mineral-rights that make money without having to work for it.

Economists however, being the optimists (and empiricists) that they are, assumed that we’d all moved on and stepped forward into an eternal golden age, where everyone was getting richer and the income gap was closing. And for most of the 20th century, the gap was actually closing.

But (according to Piketty), we weren’t looking at the math on a broad-enough scale, and we should have been paying more attention to the difference between the return on capital and the growth in economic output.

During the booming economic growth of the 20th Century, some of the economic expansion was passed on to the owners of capital – but a large portion of it accrued to the labour force (through increased employment and higher wages, etc), especially in countries where progressive taxation and redistribution programs reduced the after-tax return on capital and increased the after-tax return to labour.

But in the 1970s, the world began to liberalise, and some of the more stringent restrictions on capital accumulated were relaxed. At the same time, technological advancement meant that it became easier to substitute labour with capital investment (why have a team of accountants to update manual ledgers when a single accountant can do the same amount of work with a software package?). So capital started to accumulate, rapidly.

Then, in the last five years, we saw global economic output start to drop off. And while the wealthy have recovered from the financial crisis, the rest of society has not. This is because labour is losing on two fronts:

  1. As economic growth slows, so there is less room to argue in favour of higher wages – if anything, there is barely room to argue in favour of continuing employment; and
  2. There is more substitution of labour with capital.

“The Central Contradiction of Capitalism”

annual returns of gdp capital

What Piketty calls “the central contradiction of capitalism” is his assertion that inequality is not a distortion but actually a feature of capitalism, and that inequality rises when the rate of return to capital is higher than the economy’s rate of growth. If you look at his predictions above, you’ll see that’s where he thinks we’re headed.

Piketty argues that what we’re witnessing is the return to the “patrimonial capitalism” of Austen and Balzac, where wealth is mostly inherited, and society is ruled by oligarchs.

Which just goes to show that it pays to marry rich.

Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at Or both.