Book Review: Capital in the Twenty-First Century

[Epistemic status: I am not an economist. Many people who are economists have reviewed this book already. I review it only because if I had to slog through reading this thing I at least want to get a blog post out of it. If anything in my review contradicts that of real economists, trust them instead of me.] I. Thomas Piketty’s Capital In The Twenty-First Century isn’t just a book on inequality. It’s a book about quantitative macroeconomic history. This is much more interesting than it sounds. Piketty spent decades combing through primary sources trying to get good statistics for what the economies of various Western countries have been doing over the past 250 years. Armed with these data, he tries to put together a theory of the very-long-term forces at work in economic change. His results touch on almost every big question in politics and economics, and are able to propose sweeping theories where other people resort to parochial speculation. While more knowledgeable people than I are probably already familiar with much of this, I used him as an Econ History 101 textbook and was not at all disappointed in the results. The most important thing I learned from Piketty is that since the Industrial Revolution, normal economic growth has always been (and maybe always will be) between 1% and 1.5% per year. This came as news to me, since I often hear about countries and eras with much higher growth rates. But Piketty says all such situations are abnormal in one of a few ways. First, they can have high population growth. Population growth will increase GDP, and it will look like a high economic growth rate. But it doesn’t increase GDP per capita and it shouldn’t be considered the same as normal economic growth, which is always between 1% and 1.5% per year. Second, they can have temporary bubbles. This definitely happens, but after the inevitable bust, the whole period will eventually average out to 1% to 1.5% per year. Third, they can have “catch-up growth”. This is a broad category covering any period when a country that was previously underperforming its fundamentals gets a chance to catch up. This can happen after a long war in which a devastated country gets a chance to rebuild. Or it can happen after dropping communism or some other inefficient economic system, as the country transitions to a more practical form of production. Or it can happen when a Third World country globalizes and gets the benefits of First World technology and organization. But if a country is at peace and on the “technological frontier” (ie one of the highest-tech countries that has to invent its own advances and can’t get them by osmosis from somewhere else), it will always have growth of 1% to 1.5% per year.