Friday, October 05, 2018

I Will Return To This Point

Okay! Just wrapped up Capital in the 21st Century, and I really want to get my thoughts down while it's still fresh. It's a dense, readable, gripping book about topics that tend to seem arcane or irrelevant, and Piketty makes a compelling case for why citizens of democracies ought to pay attention. I can see why this book and the subjects it raises have formed the center of recent political debate in the US and elsewhere, and visiting the source has helped me better understand the sense of urgency it's been getting.


Reading this book is a long commitment, well over 600 pages of economics, but it's organized extraordinarily well: most sections are just about two pages long, clearly establishing a single point that can then be built upon. There's some math, but just three (important!) formulas over those 600 pages. Lots of graphs, a few tables, and some great quotes from Jane Austen, Honoré de Balzac, Titanic, and other fiction. When talking about this book, I feel a little like when I'm recommending a good but intricate television show. "It gets really good starting in the third season." "You have to watch about ten episodes to start getting a feel for what it's doing." Or it might be more like watching a game of Magic: The Gathering or Starcraft. Piketty clearly and efficiently lays groundwork, you see things building up but are not sure to what purpose; and then bam, around 300 pages in he starts tapping his cards and launching his protoss and becomes kind of hard to deny.

For my own sake, here's my personal summary of the book's thesis:

As background, economics as a field has become far too enamored of abstract, theoretical, mathematical models. "Assuming an economy with perfect competition and actors pursuing rational self-interest, what happens to X when Y does Z?" Outside of the field, politically motivated thinkers develop theories, then cherry-pick circumstantial economic data to support their desired outcomes. Piketty insists on a data-first approach: we have multiple centuries' worth of data on wealth and income and capital and tax rates and all sorts of stuff, so let's examine the data and develop theories based on that, not the other way around.

His terminology and benchmarks are similar to but slightly distinct from popular ones used in the past, such as the labor-capital split or GDP. He tends to focus on numbers as a percentage of national income, as this enables clear comparison between countries and years. He uses "capital" more or less synonymously as "wealth". Capital is something you own that produces money, whether it's dollars in a savings account, a home, stock certificates, a copyright, whatever. You can find a country's total capital by adding up the cost of all that capital: the sum of all bank deposits, the appraised value of all real estate, the market capitalization of the stock market, the going rate for copyrights, etc. National income is the sum total of all the money earned in a country for one given year: adding up everyone's paychecks, interest, rent, dividends, royalties, etc. You can then compare capital to income and get a sense for how much wealth has accumulated in a country, relative to the size of its economy.

Throughout the book, Piketty mostly focuses on France, England, the United States and Germany. Piketty is French so it's understandable that he would lead with France as an example, but he also has a great reason for this: France has fantastic detailed historical records going all the way back to the French Revolution that provide fine-grained insight into the financial state of the nation. He frequently compares these four countries, and their similarities and differences are very interesting in their own right: they generally follow the same curves, even in the pre-globalized economy, but there are some great lessons to be drawn from, for example, the relatively clean-slate start of the United States or the impact of Germany's multi-stakeholder approach to corporate governance. He occasionally brings in other examples like Sweden, Canada, Australia, or China, always carefully pointing out where data is missing or inadequate or otherwise not a good source of comparison.

One of the more ambitious projects comes early on, when he examines the history of wealth over the last two thousand years, using scant historical data and models to draw rough conclusions about what happened from 0AD until now. In summary: nothing much happened from 0-1700AD; the economy and population started to grow a tiny bit quicker for the first century of the Industrial Revolution; then it picked up significantly and we saw significant growth during the 20th century. Most economists have assumed that this is the normal environment and drawn all their conclusions based on that, but as Piketty points out, the 20th century was very much an aberration and cannot continue. In terms of population growth alone, the boom is mostly over, with Europe now having a stable population and America mostly supported by immigration; it's impossible to predict what will happen in the rest of the world, but if the 20th century increase in growth rates were to continue Earth would have a population in the trillions in a few centuries, which seems impossible to sustain.

For the most part, Piketty is interested in the period for which we have more detailed data, roughly from 1800 to the present. Looking at the size of capital relative to national incomes, we see a steady and high level (roughly 700% of national income) until the start of World War 1, then a rapid decrease through the two world wars and the Great Depression until bottoming out around 1950, then a gradual rebound until the present, eventually reaching a ratio close to what existed at the peak of the Gilded Age and continuing its upward trajectory.

Why is this? Piketty patiently works through the dynamics of capital accumulation. First, an accounting formula: α = β * r. That is: the share of capital in the national income is equal to the proportion of capital to national income, multiplied by the rate of return earned by capital. More concretely, if a country's accumulated capital (everything owned by its private citizens) is four times the national income, then β = 4. If the average rate of return of all that capital is 4%, then r = 0.04. As a result, α = 16%. Even more concretely, if this is a country where the national income is 1 trillion dollars, then 160 billion dollars will go to the owners of capital (stockholders, landlords, authors, etc.) and 840 billion dollars will be distributed as wages.

This is a tautological formula, but is helpful for thinking about how these things are related. If the value of capital in a nation increases, while the rate of return remains the same, then capital will claim an increasing share of the national income.

So: as time passes, do we expect capital to increase or decrease? The singular event around which this book turns is the period from 1914-1945, which drastically wiped out fortunes around the world and especially in Europe. A kind of perfect storm happened. There was literal destruction of capital, as bombs fell across Europe and destroyed real estate and artwork and farmland. Massive inflation destroyed the value of bonds that had been purchased in a no-inflation environment. Debts were entirely repudiated, such as after the Bolshevik revolution. Overseas colonial possessions were lost. Industries were nationalized. Confiscatory tax rates were charged to finance the war and its debt.

All this turmoil had a profound and real impact on accumulated wealth. Just as importantly, though, it is the only time we see when wealth comes under assault. Other than this, the data consistently shows, across multiple continents and multiple centuries, the steady and increasing share of capital in national economies. This proves very resilient even across different technological eras and governmental structures. Farmland used to be the major component of national capital; today it occupies a miniscule share, but financial capital has more than made up for its decline. Capital accumulation in France continued unabated as the nation shifted from republic to monarchy and back again. The United States started with extremely low capital as its early settlers arrived with very little, but immediately embarked on the same march of accumulation.

So, in the absence of a catastrophic series of events like the early 20th century, what is the "natural" stake that capital will claim in an economy? This brings up the second formula, β = s / g. That is, the share of capital in the national income will, over the long run, reflect the nation's long-term savings rate divided by its long-term growth rate. More simply, as the savings rate goes up, more capital will accumulate; as the growth rate of the overall economy increases, though, the share of capital will decline. 

The savings rate is just how much money doesn't get spent. This may vary a little based on national culture and priorities: an aging, pessimistic population will consume less and save more, while a young and optimistic population will tend to save less. But it's also worth noting that income from capital tend to be plowed back into more capital. If you didn't need to spend that money in the first place, you probably don't need to spend what it produces, so you can save the fruits of what you've previously saved.

Piketty divides the growth rate into two components, population growth and productivity growth, that are simply added together. In other words, the growth of a nation's economy is the sum of the growth of its population (how many more people will be doing work) and the growth in its productivity (how much more work each individual person can do, on average, thanks to improved technology or education or training).

During the second half of the 20th century, we've grown accustomed to think that national growth "should" be around 4%, but as Piketty compellingly shows, that is unrealistically high and unsustainable. Historically, the growth rate was close to 0% from 0-1700AD. Even the industrial revolution, with its much-vaunted productivity, produced an annual growth rate of around 1%. Most of the immense productivity gains of the 20th century was thanks to population growth, a boom that is over in Europe and slowing elsewhere. Piketty sees a total growth rate of 1.5% as the upper bounds of a realistic, good growth rate, with even 1% good by historical standards. The only time we can see a sustained growth rate of significantly higher than that (the 3-4% people want) is when a less-advanced economy is catching up to the technological innovations of a more advanced economy, as happened in Europe and Japan during post-WW2 reconstruction and as is happening in China today. Eventually the economy catches up to the threshold of innovation, and from that point on, it can count itself lucky to sustain a growth rate of 1% plus whatever population growth it can manage.

I found it helpful to intuitively think of β = s / g like this: when the growth rate is high, a lot of new dollars are entering the economy. The total size of the economy grows more quickly than people can save, so capital shrinks relative to the economy (even though its total size increases). When growth slows, capital still continues to increase, but at a faster rate than the economy, so more of the new dollars produced by the economy will be "stored" in capital. Eventually you reach an equilibrium where the allocation of new dollars from growth matches the existing ratio of capital in the economy, at which point β and g stay consistent and the total sizes continue to grow at the same proportion.

What's the upshot of all this? During the 20th century, we saw a decline in the value of capital, followed by a very slow recovery of capital, and people (who were very reasonably drawing from their immediate experience and evidence of the present) assumed that the new normal of the global economy was fundamentally different from that of the 19th century: Marxism had been refuted, his dire predictions of ever-increasing capital disproven, and now everyone would enjoy in the fruits of a more egalitarian and labor-friendly market that would continue indefinitely.

Piketty's point is that the slow recovery of capital post-WW2 was a direct consequence of the abnormally high and unsustainable growth rate. Now that growth is slowing, we see capital accumulation correspondingly accelerating, at the same rates we saw during the Gilded Age. There's no natural force that will stop this accumulation or prevent it from passing the highs we saw then.

The obvious question is: so what? Up until this point, Piketty has focused only on aggregates, what's happening in nations as a whole. Now he starts to look at what's happening within nations, how those top-line numbers break down and affect individual citizens' lives within those countries.

High capital accumulation isn't necessarily intrinsically bad. We can imagine a society where capital is shared more or less equally, where most citizens have comparable wealth. In practice, this would likely mean that each person would have a cushion against unexpected turmoil. They would still need to work for a living, but might not need to work as many hours to achieve the sort of lifestyle they desire, since it would be supplemented by payments from other citizens on their capital.

In practice, does this happen? Hell no. We're now moving into the more politically charged part of the book, as Piketty walks through a wide-ranging look at the breakdown of wealth (and income) across nations. This is the part of Piketty that most of us have heard about. He breaks down wealth into deciles and centiles, looking at what percentage of people own what percentage of capital. His talk of "the bottom 50%" and "the top 10%" allows him to systemically compare equivalent benchmarks across diverse societies, in the way that traditional categories like "the upper class" and "the working poor" cannot.

To summarize his findings: the poor have always been poor. Not only that, they've been consistently destitute: from the United States to Germany to Australia, from the 1850s to the 1900s to the 1950s to the 2000s, the bottom 50% of the population owns between 0-5% of a nation's wealth. That means that, in the best case, the median member of half the population owns 1/10 of their mean share. The one exception Piketty finds: in the 1970s and 1980s, the Scandinavian countries' bottom 50% owned as much as 10% of their nations' wealth. Even then, the best example we have in all of history, they owned 1/5 of their mean share; far more often, the poor own nothing, and have nothing to pass on when they die.

Where there has been some change over the past century is the bracket from the 10% down to the 50% wealthiest, who you might broadly call the "middle class". During the Gilded Age this cohort owned around 5-10% of their nation's wealth. Today, they own around 25%. In other words, today, the upper half of a county (excluding its very top) holds about a quarter of their nation's wealth. In absolute terms going from 10-25% might not seem like much, but it more than doubles their prior share, and has a significant impact on their (our?) lives and prospects. Piketty calls this the rise of the "patrimonial middle class": people who, over the course of their lives, can assemble a modest financial legacy that they can then pass on to their children.

The upper 10% is of course much wealthier. For all the recent rise in inequality, we are not yet at the levels seen during the Gilded Age. Back then, the top 10% of a country's people owned 90% of its wealth, so each member of the upper class owned, on average, nine times as much as the mean wealth. In contrast, today's 10% owns about 70% of the nation's wealth, or a mere seven times the mean wealth. The effect gets more pronounced as you climb higher up the scale. On the eve of WW1, the top 1% owned 50% of the wealth; today, the top 1% own 35% of the wealth.

The underlying reason for this is his third and final observation: inequality increases when r > g. In other words, when the rate of return on capital is greater than the growth rate of the entire economy, those who already hold fortunes will accumulate money at a faster rate than the rest of the economy. Money acquired in the past wins out against new wealth created today. Those holding capital will pull further and further ahead of everyone else, snowballing and eventually drawing down not only new national income but even cutting into what others are earning. The early and mid 20th century was a time when g > r: growth was abnormally high due to a booming population and post-war reconstruction, and r was unusually low thanks to high taxes and governmental policies like rent control. But that period was an aberration. Now that growth is slowing, and taxes on capital were  demolished in the 1980s and 2000s, we are witnessing the return of the Gilded Age's plutocrats.

Again: so what? The standard argument is that those in the top brackets are there by basis of merit: they've worked harder and smarter and taken more risks, so they're rewarded with fortunes. Piketty painstakingly walks through the data to show that this isn't the case. Yes, people can earn fortunes through a lifetime of hard work (especially in the era of high growth that we're currently exiting): but those who inherit fortunes can earn just as much without working a day in their life. He brings this home with a vivid, concrete example. Bill Gates was the wealthiest man on Earth for about two decades, during which time he built Microsoft into a megalith and revolutionized computing. Piketty is deeply skeptical of the entrepreneurial cult worshiping Gates - he points out that Gates' contributions are heavily indebted to the work of thousands of computer scientists who did not receive anything close to his rewards - but, still, two decades of hard work at the top of his empire saw Gates' fortune expand by about 10% per year (in real returns). To contrast this, he looks at Liliane Bettencourt, the richest woman in the world. Liliane did not work at all: she inherited her fortune from her father and lived as an heiress. And during those same 20 years when Gates' fortune expanded by 10% per year, Bettencourt's fortune expanded by 10% per year. Beyond a certain point, capital becomes self-perpetuating. The existence of self-made millionaires in the Wealthiest Americans list shouldn't obscure the fact that many more people got there through accident of birth. And, furthermore, that trend will accelerate in the future: as growth slows and capital stocks accumulate, those lucky enough to inherit a fortune will have an insurmountable lead, reaping returns on their capital far more quickly than anyone can accomplish through a lifetime of labor.

There's a lot of other great stuff in this section, some of which I'll return to down below, but for now I'll skip ahead to the final section. So far we've gone through three explicit arguments (capital shares naturally increase over time, capital shares grow inversely to the economy, existing wealth in the past is rewarded far more than new labor generated in the present and will lead to a widening gap between the ultra-wealthy and everyone else) and one implicit assumption (it's bad for a society to have a tiny class that owns virtually everything and a large class that owns virtually nothing). The fourth section considers what can be done about this. Previous economists thought that the market economy would naturally solve inequalities over time, but if it won't correct itself, it will require political action to do so.

Piketty makes a forceful case for creating a global, progressive, annual tax on capital. Across planet Earth, every nation would sum up the net worth of each citizen (all their assets minus all their debts) and tax the result. Piketty admits that it's virtually impossible that such a tax would be implemented, but still thinks that it's a good idea and a great conversation to start, so he walks through it in detail to show how it could be set and what it would accomplish. To make it concrete, he imagines charging perhaps 0.1% on wealth under 200,0000 euros, 0.5% on wealth up to 1 million euros, 1% on wealth  from 1-5 million euros, and 2% on wealth over 5 million euros. Higher rates could be set on even higher brackets, with perhaps 10% on fortunes over 1 billion euros. The taxes at the top would not bring in all that much revenue, since not many people earn that much, but would be an incredibly powerful force for reducing inequality. The middle brackets, on the other hand, could bring in an enormous amount and potentially replace many (not all) other taxes charged today.

It's interesting, for example, to think about the property tax. Imagine you buy a house today for $500,000. You pay $100,000 as a down payment, and borrow $400,000 as a mortgage. Suppose your state charges a 1% annual property tax, which comes to $5,000 a year. You own 20% of the house and the bank owns the other 80%, but you're responsible for 100% of the tax payment and must pay the full $5,000.

Now imagine the capital tax. Suppose you own that $500,000 house, and have another $100,000 in various financial assets (bank accounts, mutual funds, etc.), and owe that $400,000 loan to the bank. You add up your assets ($600,000) and subtract your debt ($400,000) to reach your total capital ($200,000). That would place you in the 0.1% tax bracket, requiring you to pay $200. The bank owns the other $400,000 of capital in your home, which is added to its net worth, which is ultimately paid by the owners of the bank. Over time, as you pay down the mortgage, your net worth increases, with you gradually paying more of the tax as you come to own more of the asset.

So, yeah: the tax on capital would completely replace the property tax. In general Piketty wants everything to be more transparent and treated equivalently: stop allowing corrupt billionaires to hide their income in shady tax havens through questionable holding companies. Have everyone declare what they own and pay what they owe. Current tax code is largely accidental, based on what it was easy to do at the time (it's very easy to tell when someone's living in a house) or driven by emergencies (the United States and other countries charging extremely high income taxes in the mid-century). Even his progressive tax on capital isn't an end-all solution. Ultimately, Piketty wants to establish democratic control over the economy, and have the power in the future to debate and decide how they wish the economy to grow.

Phew! I imagined the above summary being just a couple of paragraphs, guess I got carried away. ANYWAYS, there's some stuff I want to talk about, starting: now!

I found myself thinking of The Battle for the Soul of Capitalism often while reading this book. Bogle and Piketty are coming at this from very different directions: Bogle is a captain within the financial industry with a fullhearted and unexamined devotion to the principles of capitalism. Piketty is an economist examining the economy from the outside with a nuanced and critical view of capitalism. Both of them are very alarmed by the trends that they see: skyrocketing executive compensation, financial shenanigans, a widening gap between rich and poor, fraying of the social safety net. Their views on compensation are interesting to contrast. Bogle sees managers as villains, people who have betrayed the trust placed in them by the company and looting the shareholders' well-earned gains for their own benefit. Piketty refers to this class as "supermanagers", and to him they're... maybe more like antiheroes. Managerial income does come from labor, and does not depend on an inheritance, existing wealth, or even (necessarily) social class or family status. Yet, their compensation is completely unjustified, far outside the value a reasonable observer would believe they generate for the company. Piketty sees a coming struggle between the dynamic new supermanagers and the static old heirs, and can't cheer for either side. It's a bit like watching Alien and Predator fight: it's compelling, but humanity won't be well served by the victory of either side.

Bogle just sees the supermanagers as decreasing the (capital) payments to shareholders. Piketty also sees them in the context to the payments made to labor. Looking more closely at the capital share, I think the underlying question and the potential point of difference between Bogle and Piketty lies in who owns that capital. If it's widely distributed, as it may have been when Bogle was getting his start in the 1950s (with shares primarily owned by dentists and architects and pension funds), then the supermanagers are stealing from the pockets of the middle class and should be condemned. But if the capital is concentrated in the hands of the elite, as it was during the gilded age and will be again in the future, then the supermanagers are drawing down the fortunes of the 1%. Which... I dunno. In a war between millionaires and billionaires, I guess you cheer for the millionaires? Maybe?

Of course, another significant difference between Bogle and Piketty is that Bogle is American and Piketty is French. We both share democratic traditions and free-market economies, but have rather different institutions, histories, and attitudes. Piketty addresses some of those differences directly (via ever-helpful graphs and tables), and it also underlies a lot of his thinking and criticism. For example, he quotes often from the Declaration of the Rights of the Man and of the Citizen, which holds a similar power over the French mind as the Declaration of Independence does over the American. I don't think it's a coincidence that "liberty, equality, fraternity" resonates slightly differently from "life, liberty, and the pursuit of happiness".

Particularly near the end of the book, Piketty writes a lot about "democracy regaining control over capitalism." This sounds reasonable (democracy is good!), but what this really means is a whole society democratically deciding what to do about individual fortunes. Americans in particular seem likely to ask, "Why should anyone else have any input into the use of my money?", and I suspect that the American populace in general will be more resistant to this kind of development than Europeans, for ideological rather than self-interested reasons.

Piketty briefly touches on a continuum of "deserving" money. Nearly everyone would agree that if someone stole money, they don't deserve to keep it: the state can rightfully confiscate the entire amount. If you happen to just find money lying on the ground and grab it, it doesn't seem "earned", and it seems more reasonable for you to share some. Then there's money that you received as a gift and didn't work for. And finally there's money that you earned through your own labor, which almost everyone feels is the most "deserved" ownership.

I think that Americans probably lean more towards the earlier side of the continuum, with almost any non-illegal source of income honored, while Europeans (including Piketty) lean more towards the latter, with income that you didn't personally work for seen as at least partially a public rather than a private resource. And that difference is fine! Piketty's real point is that we need to have a democratic (and not a plutocratic) debate about this. Currently, citizens are almost totally disengaged from "boring" tax policy debates, leaving the influence to people like Michael Bloomberg and Sheldon Adelson who drop millions of dollars on electing the Senate and then have significant say over economic policy. Once the plutocracy is sidelined and a more representative legislature debates, we'll still end up with national differences, due to our distinct cultures and priorities and characteristics. Piketty notes in passing that American marginal productivity is consistently about 20% higher than French productivity, presumably because it's in our character to work harder and enjoy life less. That difference will help drive our tax code: how much we need, what we spend it on, how richly to reward entrepreneurship versus investing in education. Having differences between nations seems useful: they can become laboratories of democracies and economies, not unlike how states within the US can try new policies and other states can observe the results.

Adopting an annual tax on capital seems like a very tough sell in America, but the more I think about it, the less exotic it seems. As noted above, the property tax already serves as a (limited, unequal) form of a wealth tax. Another interesting analogy is the severance tax that American states charge on the extraction of natural resources: it doesn't serve the same purpose or cause the same effect as a tax on capital, but I think its justification is somewhat similar. Extracting resources from the land requires labor and capital and effort, and the enterprise does justify earning a profit; but the extractor did not put the oil in the ground. At a broad level, natural resources belong to the entire nation. It seems reasonable to pay the nation (via our agents in government) for using our natural wealth. That's also a potential way to think about a tax on wealth, especially inherited wealth. You didn't create that wealth by yourself, and your father didn't invent it out of thin air. The fortune relies on the public sphere we've built over centuries: the creation of markets, a class of monied consumers, a skilled workforce, a common currency, transportation networks, and so on. By definition, those who have accumulated wealth have profited from the system, and it seems eminently fair that they help sustain it.

And, ultimately, it's in the best interest of wealthy scions to help sustain that public system. Piketty's real concern in this book isn't so much a permanent plutocratic class; he doesn't see the endgame of no action as being an enduring dictatorship of the top 0.1%. Such an extreme inequality will, in his view, inevitably lead to violent social conflict: he fears another French Revolution, another Bolshevik uprising. It isn't exactly Marx, though. Because of how capital accumulation works, he doesn't welcome the revolution: once the new regime takes over, the process will begin all over again. The only way to break the wheel is to yoke the oxen of capitalism to the control of democratic government. We need its dynamism and its growth, but must curtail its extremes, because left to its own devices it will cause great division and misery.

I've done some light Googling while looking up statistics for this post, and in the process have stumbled across quite a lot of criticism of this book, much of which seems to miss the point. Piketty is pointing out the problems on the horizon, as growth in developed economies slows and as taxes on capital are further cut. Saying "Newly wealthy people are being created now!" isn't surprising: Piketty's point is that by the end of the 21st century, a lifetime of highly-paid work won't accumulate as much as inheriting a fortune that started growing in 1950.

Reading various peoples' opinions about the source of inequality reminds me a lot of peoples' opinions about the cause of the Civil War. A low-information outsider will have a naive understanding: "Slavery caused the civil war." "Poor people don't have enough money, so we should raise the minimum wage so they can earn more money." People who are interested in the subject sneer at those naive opinions. "Well, actually, the Civil War was caused by industrialization / the cotton gin / states' rights / whatever." "Well, actually, raising the minimum wage will just cause people to lose their jobs, IDIOT, the right solution is to abolish the minimum wage and cut taxes on job creators." And then the experts who actually study the topic for a living weigh in. "No, the Civil War really WAS caused by slavery." "No, if the minimum wage is sufficiently far below the average wage, you can safely raise the minimum wage without any increase in unemployment, and in the process slightly slow the process of capital concentration."

For the most part I found this book incredibly persuasive, but there are a few aspects that left me curious at the end. (To be fair, some or all of them might be addressed in the endnotes, most of which I skipped.) One thing I wonder about a lot is how shocks fit into long-term trends: are they subsumed into those trends, do they modulate the magnitude of those trends, or are they truly unique events that stand apart from those trends? During the roughly three centuries that Piketty mostly focuses on, there was one huge negative shock (WW1+Depression+WW2), and one seemingly non-repeatable positive windfall (expansion into the American continent). He doesn't spend a whole lot of time in the 0-1700AD era, and (convincingly) summarizes what happened in general during that time: no productivity growth, almost no population growth. But, of course, if we did have detailed data for that era, we wouldn't see a smooth and unbroken 0.1% population growth for those 1700 years. Events like the Black Death and wars would have been incredible shocks at the time: the Black Death probably killed from 30%-60% of Europe's population in just a few years. So, it seems like if we omit the Plague, the actual population growth rate must have been above 0.1%. Is it possible that the long-term trends of the past produced numbers closer to what we observe today? If we successfully prevent future pandemics and future wars, will higher growth rates naturally follow?

Should these sorts of shocks be included as part of long-term trends (as Piketty presumably does) or treated as unique events (as he handles the early 20th century)? The 1914-1945 shock seems like a once-in-history event, but I wonder if it is. Consider the turnover of capital in England following the Norman Conquest, or really any major conquest or plague event. In the best case scenario, the "natural" growth rate is higher than the historical values Piketty observes, which will automatically help mitigate the accumulation of capital thanks to β = s / g, even though it won't solve it. On the other hand, those kinds of wars and natural catastrophes probably also helped break up capital accumulation. Lands were confiscated after conquests, aristocratic families died out with no heirs, duchies were devastated by famines or plagues. So, one possible outcome of fewer future shocks might be greater overall prosperity and slower accumulation of capital, but even greater concentration of that wealth into even fewer hands, as past wealth continues to grow uninterrupted by man or nature.

And that's the other thing about Piketty that's worth thinking about: are we worried that specific dynasties will grow unabated (the Rockefellers, the Waltons, the Rothschilds)? Or is the threat that the superrich class will continue to grow even superricher, but we'll still see movement in and out of that class across generations? Near the end of the book I found myself thinking of the old phrase about "a fortune is lost in three generations"; of course, since this book is so data-driven, I'm now very curious if that's just folk wisdom or if there's hard data behind it. It may be overstated: "rich dude loses his fortune" is a more compelling story than "rich dude keeps fortune", so we may hear a disproportionate number of stories about losses. And, again, we're emerging from a very specific historical moment in which capital was devastated and many fortunes lost, but the presence of very real examples in our recent past does not mean that it will be a natural state going forward: the more quickly capital grows and the greater advantage conferred upon existing large fortunes, the more difficult it becomes for even a spendrift failson to completely squander it.

But if that old saying is more or less true, and dynasties tend to naturally end, we get a more dynamic picture of wealth. New fortunes are created, endure for a few generations, then disperse, as the upper class slowly shuffles its membership over time. That's still an inegalitarian picture, as real and immense benefits are bestowed upon undeserving heirs (not all of us get the opportunity to fritter away billions), but it feels less apocalyptic than the other scenario of ever-increasing elite patrimonial lines. Ultimately, though, that distinction doesn't really matter that much on the scale of an individual human lifespan. As Piketty notes elsewhere in the book, even a short-term trend can last decades, and it's small comfort to a person harmed by that trend to know that it's only "short-term." The difference is really interesting for the completeness of the picture, but the salient fact is the presence and acceleration of inequality.

For the most part I was interested in this book as a theory and as a means of understanding today's economic and political debates. But I have to admit that part of my brain was thinking about what this meant for me and my personal profit$: like a lot of middle-class-ish Americans, I've accumulated some of my own capital over the years, and of course I'm motivated to grow it. This sort of came to a head during Piketty's analysis of university endowments, which is awesome but was also personally worrying. Basically, by comparing the returns of hundreds of American universities, he shows a clear and consistent correlation between endowment sizes and rates of return. The wealthiest universities with the largest fortunes (Harvard, Yale, Princeton) have the highest return on their investments, and that return steadily declines along with endowment size.

For the last 15 years, I've adopted the gospel of John Bogle: you shouldn't try to beat the market, just own all of it. In the big scheme of things, the entire market earns the average return. For everyone who places a winning bet, someone places a corresponding losing bet, and you can't know in advance which is which. The one thing you can control is your costs, so instead of trying to beat the market, you should invest in low-cost indexed mutual funds and buy the entire economy.

Well, the university analysis puts the lie to that seemingly-reasonable syllogism. Spending more on wealth managers and financial analysts does lead consistently to greater returns. Granted, this isn't relevant for me: I'm not even worth the <$100 million bottom endowments that make do with meager 6% annual gains, let alone the vast sums that earn 10%. But in breaking down the reason for this divergence, Piketty reveals that "owning the market" does not mean exposure to or capturing all of the gains. Harvard's highly-paid investors have access to unlisted stocks and private equity funds and mineral explorations. By definition, when I own the publicly-traded stock market, I have zero exposure to those private, unlisted, off-the-books ventures. The public market may reflect the economy, but it is not the economy.

Bluntly, indexing can't match actual growth. When you stop and think about this, it intuitively makes sense that the most talented, motivated, and connected people will seize limited opportunities for themselves: snapping up shares before they're officially offered, for example. Let's suppose that this represents the top 10% highest-performing assets. That leaves the bottom 90% of assets available for everyone else to compete for. It's within this diminished world that the standard advice of "you can't control returns, only expenses" kicks in.

So, what's my takeaway as a greedy wannabe capitalist? It doesn't change my strategy. As Piketty points out, the high absolute expenses required to achieve above-average growth only make sense when it's a small fraction of the total size of a fortune, and, uh, I ain't going to be there any time soon. But it does make me more pessimistic about future returns. The earnings available to bourgeois investors will always lag the real earnings of the entire economy, after the elite have taken their share. And that gap will continue to grow as capital continues to concentrate: larger fortunes grow even larger, supermanagers amass their own pile, and the patrimonial middle class is left to scrap over an ever-shrinking slice of the pie.

Yay! So, yeah. I really like the note that Piketty ends the book on. As he sees it, capitalism poses real and incredibly difficult challenges. They are solvable, but will require an extraordinary amount of political will. That may seem impossible on its face; but 80+% income tax rates would have seemed impossible in 1910, and not only were they accepted after the great depression, they helped power America through 50 years of unprecedented growth. This book has already accomplished Piketty's goal of launching a democratic conversation, and I suspect this debate will continue for much of my remaining life.

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