Whichever of the 18 worthy books on economics and finance eventually ends up winning this year’s Financial Times/McKinsey “Business Book of the Year Award,” it’s already clear which work has had the most transformational effect on this decade’s intense debate on economic policy. One of the finalists in that book competition, “Capital in the Twenty-First Century” by Thomas Piketty, has been hailed as a landmark analysis of the inexorable trends driving the modern-day economy, with Piketty’s scholarship abruptly detonating a debate that has profound implications for public policy and long-term economic theory.
Washington policymakers may sometimes be slow to embrace dramatic and innovative ideas about economics, but the impact of Piketty’s reach and relevance – especially after the financial Crash of 2008 – became even clearer when the chairman of the White House Council of Economic Advisers recently led a scholarly seminar at the World Bank Group, describing the impact of Piketty’s thinking on the Obama Administration’s approach to economic policy. If the White House itself is focusing on Piketty’s diagnosis of the ills now afflicting many Western economies, then his analysis should clearly rivet the attention of everyone who’s concerned with building shared prosperity globally.
When Jason Furman, the President’s chief economic adviser, came to the Bank as part of the Development Economics Lecture Series to analyze Piketty’s logic – describing how Piketty’s “Capital” is now being factored into the White House’s policymaking – the rapt attention of the throng in the Bank’s Old Board Room (and spilling out into the adjoining corridors) illustrated how Piketty’s work has been swaying economists’ debates.
Those debates have consumed policy-watchers not just at the Bank, the International Monetary Fund and other leading global financial institutions, but also at the Federal Reserve System and in policy journals and university economics departments worldwide. Even financial firms that epitomize Wall Street’s do-what-works, drop-all-ideology pragmatism – like Standard & Poor’s, which recently issued a candid analysis of how “too much inequality can undermine growth” – warn of the dangers of extreme inequality.
The video of the event can be viewed by clicking on the screen directly below, or by linking to the World Bank Group website: http://live.worldbank.org/lessons-for-inclusive-growth.
Furman’s DEC Lecture thus underscored the transformation in economic thinking that has been occurring, thanks in large part to Piketty. Mainstream economic institutions are newly attentive to the widening economic divide – the chronic gaps within each nation, and the enduring chasm between developed and developing nations. Furman himself helped contribute to the knowledge-base about inequality when he served on the Bank staff as a Senior Advisor to then-Chief Economist Joseph Stiglitz.
Furman’s lecture was the latest in a series of Bank discussions on inequality, including an InfoShop forum with Chrystia Freeland – formerly a journalist with the Financial Times and Thomson Reuters who is now a member of the Canadian Parliament – discussing her celebrated work “Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else.” Freeland applauded the voluminous Bank research – including the work of Branko Milanovic, the esteemed former Bank economist who is now at the City University of New York – that has helped lay the foundations of the inequality debate.
Given the linear logic that was spelled out in Furman’s data-rich DEC Lecture, it’s little wonder that Piketty’s research has inspired accolades from scholars like Milanovic, the author of “The Haves and the Have-Nots,” who has hailed “Capital” as “one of the watershed books of economic thinking.” Piketty’s work has also been praised as “the most important economics book of the year, and maybe of the decade” by Nobel Prize-winning economist Paul Krugman of the New York Times, and has been lauded as “an extraordinarily important” work “of vast historical scope, grounded in exhaustive fact-based research” by Martin Wolf of the Financial Times.
Introducing his lecture, entitled “Lessons for Inclusive Growth, from the U.S. and the World,” Furman said that “the ultimate test of economic performance” is “ensuring that the benefits of growth are broadly shared.” Such a broad sharing of prosperity may once have been a standard feature of advanced Western economies – but for at least the last 30 years, income inequality and wealth inequality have dramatically widened. Piketty’s meticulous work shows why.
As Furman detailed, Piketty’s data-driven research confirms what many economy-watchers have long suspected – and what many long-suffering wage-earners have long felt amid the aftermath of the Crash of 2008 and the Great Recession that followed: The trend toward the concentration of capital in modern-day industrialized economies is intensifying.
Crucially, Piketty contends that such a concentration is not an accident: Instead, the “rich get richer” phenomenon is a fundamental feature of the way that income and wealth are distributed in modern-day capitalism, for a straightforward reason: The rate of return to capital, over the long term, is higher than the rate of return to labor.
Capital-income inequality is thus self-perpetuating. As Furman explained: “How much wealth you have today is a function of how much income you had in the past, and a function of your rate of return, which itself is higher for higher-wealth households.”
Or as Piketty, aided by his skillful translator Arthur Goldhammer, more poetically declares: “The past devours the future.”